The market bets on continued rate hikes by the Reserve Bank of Australia, with the Australian dollar holding near multi-month highs

1. On Tuesday, the Australian dollar hovered near a four-month high against the US dollar and approached a two-year high against the euro, as investors continued to bet that the Reserve Bank of Australia would further raise interest rates to tackle inflation. Reserve Bank of Australia Assistant Governor Hunter stated that the policy committee has extremely low tolerance for rising inflation and may have to implement a fourth rate hike this year. The market currently expects a 68% probability of a 25 basis point rate hike to 4.60% at the September policy meeting, significantly higher than the less than 10% probability one month ago.2. Hawkish expectations have pushed the yield on 10-year Australian government bonds to 5.195%, the highest since mid-2011, widening the yield spread with US Treasuries to 43 basis points. The Australian dollar is currently trading near 0.7213 against the US dollar, with the next major targets at the May high of 0.7277 US dollars and the 0.7285 US dollar high set in mid-2022. However, due to the overall strengthening of the yen, the Australian dollar fell 1% overnight against the yen to 111.22.3. However, expectations of rate hikes and economic headwinds are creating dual pressures. A survey by National Australia Bank showed that the August business conditions index fell to minus 1, a six-year low, as cost pressures continued to squeeze corporate profit margins. Meanwhile, a Westpac survey showed that the September consumer confidence index fell 5.2% to 84.4, almost fully reversing last month's increase.4. The New Zealand dollar fell 0.34% against the US dollar to 0.5858, while the Australian dollar once rose 0.43% against the New Zealand dollar to 1.2330, marking a 13-year high, as the market believes the probability of further aggressive tightening by the Reserve Bank of New Zealand has diminished, leading to heavy selling of the New Zealand dollar against the Australian dollar in recent days.