The Australian dollar seesawed on Tuesday after the country's central bank raised rates by a surprisingly large 50 basis points and flagged more to come, sending bond yields to peaks not seen in a decade.
The Aussie initially jumped by half a cent on the news but quickly ran into profit-taking, dragging it back to $0.7175 AUD=D3 from a top of $0.7248.
Dealers reported stiff resistance at the 200-day moving average of $0.7257, while support lies around $0.7140.
The New Zealand dollar slipped 0.6% to $0.6450 NZD=D3 as its U.S. counterpart strengthened broadly.
The Reserve Bank of Australia (RBA) raised the cash rate to 0.85% after its June policy meeting, stunning investors who had wagered on a move of either 25 or 40 basis points.
Policymakers are clearly far from done, with RBA Governor Philip Lowe saying inflation was running hotter than thought just a month ago and further hikes would be needed to "normalise" policy.
Lowe has in the past suggested a neutral level for rates could be around 2.5%.
Markets quickly moved to price in a more aggressive pace of tightening with July futures
0#YIB: implying a rate of 1.13% and thus another move of 50 basis points. RBAWATCHThe December contract collapsed 38 ticks to imply rates would reach 3.08% by Christmas. Yields on three-year bonds AU3YT=RR climbed as much as 19 basis points to 3.29% and heights not seen since early 2012.
"Our view is that rates will peak at higher levels than most anticipate and we're expecting another 50bp hike in July and August," said Marcel Thieliant, a senior economist at Capital Economics.
"With wholesale energy prices surging and business surveys pointing to a further acceleration in price pressures this quarter, we expect inflation to peak at over 7% in Q3," he added. "As such, we are comfortable with our above-consensus forecast that rates will peak at 3% by early-2023."
Yields on 10-year bonds AU10YT=RR rose by 8 basis points to 3.55% and the curve flattened as markets assume a speedy cycle of hikes will eventually slow the economy and inflation.
That outlook gave the Aussie a lift on the Japanese yen where yields are being kept near zero, which saw the Aussie hit a seven-year top of 96.11 AUDJPY= before running into selling.
