Australian dollar climbs as RBA puts rate hikes on table

By Wayne Cole

SYDNEY, Dec 9 (Reuters) - The Australian dollar popped higher on Tuesday after the head of the country's central bank ruled out further rate cuts and put a possible tightening on the table should inflation not cool as desired, sending bonds reeling.

The comments from Reserve Bank of Australia Governor Michele Bullock followed a policy meeting where rates were kept at 3.6%, and were considerably more blunt than the actual statement.

Bullock said the RBA board was "uncomfortable" about the stubbornness of inflation and wanted to signal it would act if price pressures did not abate.

This meant the outlook was for either an extended hold on rates or for the next move to be up, she added.

"The press conference was decidedly more hawkish," noted Josh Williamson, an analyst at Citi. "The RBA easing bias is officially over and the next move will probably be a hike."

Markets had already shifted to price in a tightening given recent inflation and consumption data, and quickly moved to narrow the odds on hikes.

A move at the next RBA meeting in February was now seen as a 28% chance, up from 12% earlier, while March had moved near to 50%. A quarter-point rise to 3.85% is now fully priced by June, compared to August before Bullock spoke.

Investors reacted by pushing the Aussie up 0.3% to $0.6646 AUD=D3, but faced stiff resistance around $0.6650. Support comes at $0.6595, with the major bull target at the September top of $0.6706.

The kiwi dollar followed along with a rise to $0.5792 NZD=D3, nearing resistance at $0.5801.

The hawkish shift savaged bonds, sending three-year futures YTTc1 down 10 ticks to 95.805, and threatening a major trough from November last year 95.760.

"It’s possible that the RBA will just sit out the current strength in underlying inflation," said Marcel Thieliant, head of Asia-Pacific economics at Capital Economics.

"However, this is a risky strategy with private demand now rebounding even as public demand continues to expand at a brisk pace," he added. "We expect the Bank to hike its policy rate again as soon as February."

Yields on 10-year bonds AU10YT=RR duly climbed 6 basis points to a two-year top of 4.772%. The yield premium over Treasuries blew out to +59 basis points, from around -20 basis points in the middle of the year.