Australia, New Zealand dollars on the ropes as RBA enters the ring

The Australian and New Zealand dollars were pinned near multi-month lows on Monday ahead of a policy meeting by Australia's central bank where it is likely to end quantitative easing but might not sound as hawkish as markets are pricing in.
 

The Aussie was huddled at $0.7036, having shed 2.5% last week to the lowest since July 2020 at $0.6967. The break of the 2021 trough of $0.6993 reinforced the bearish technical background and argued for a further retreat to $0.6924 and even as far as $0.6758.
 

The kiwi dollar also sank 2.5% last week to last stand at $0.6553, depths not seen since October 2020. With support at $0.6590 breached, the next bear target is $0.6512.
 

Both have lost ground as markets rushed to price in the risk of an ever-more hawkish outlook for Federal Reserve policy, with almost five hikes now implied by futures.
 

Investors fully expect the Reserve Bank of Australia (RBA) will end its bond buying campaign at its policy meeting on Tuesday and are wagering it could hike rates as soon as May given rising inflation and low unemployment.
 

"We don't expect the RBA to raise the cash rate until August," said Kim Mundy, a currency strategist at CBA. "In contrast, we expect the Fed to stop loosening and start tightening in March."
 

"The earlier interest rate lift-off by the Fed is a more important driver of AUD in our view, and can push it to $0.6823 in the near term."
 

One added risk is that the RBA again rejects the market's hawkish view and sticks to its stance that a hike is unlikely this year, even as it revises up forecasts for inflation.
 

Key will be a speech by RBA Governor Philip Lowe on Wednesday given he has sounded doggedly dovish in all his recent appearances.
 

The bond market could do with some comforting words after three-year yields reached their highest since mid-2019 last week at 1.315%, before easing a little to 1.21%.
 

Australia also has retail sales figures for December on Tuesday which could show a pullback after two very strong months, while New Zealand employment figures on Wednesday should show a super-tight labour market.