Australian dollar flat as geopolitics weigh on sentiment

By Wayne Cole

SYDNEY, Jan 5 (Reuters) - The Australian dollar flatlined on Monday as the latest flare-up in geopolitical tensions prompted a knee-jerk pullback in risk sentiment, though relatively high bond yields at home provided a cushion.

The commodity-heavy currency is used as a liquid proxy for risk appetite globally, even suffering after the United States attacked Venezuela, which is thousands of kilometres away from Australia and has no obvious relevance.

Moves were minor and after an early dip the Aussie steadied at $0.6686 AUD=D3, just off last week's 14-month top of $0.6727. Support lies around $0.6660 and $0.6592.

The kiwi dollar eased 0.1% to $0.5760 NZD=D3, some way off its recent high of $0.5853. Major chart support lies in the $0.5736/40 area.
The Aussie was underpinned by wagers of higher interest rates at home, which have lifted 10-year bond yields AU10YT=RR to their highest since late 2023 at 4.81%. That leaves yields an enticing 67 basis points above U.S. Treasuries.

Markets imply around a 39% chance the Reserve Bank of Australia could hike its 3.6% cash rate as soon as February, with much depending on upcoming inflation reports. 0#AUDIRPR

The monthly consumer price data for November are out on Wednesday and forecasts favour a slight slowdown to 3.7%, from 3.8% the month before.

The trimmed mean measure of core inflation could dip to 3.2%, after an alarmingly high reading of 3.3% in October, and would still be above the RBA's target range of 2% to 3%.

Faraz Syed, an economist at Citi, thinks core inflation will stay at 3.3% in November, fuelling the chance of an uncomfortably hot reading for the entire fourth quarter.

"The second month of the quarter most closely aligns with the quarterly estimate," he said. "We see risks skewed to the upside, which would further cement our view that the RBA will hike by 25bps in February and May."

The Reserve Bank of New Zealand has signalled its aggressive easing campaign is likely over, following 225 basis points of cuts, but has also pushed back against pricing for an early hike in the 2.25% cash rate.

Markets have largely given up on the chance of a rise before September, which is now priced at 44%, with a move in October implied at 76%. 0#NZDIRPR