CHART: Markets are starting to price in rate hikes from the RBA

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Rate cuts are out, rate hikes are in.

So says Australian interest rate traders who have now started to price in the prospect of a rate hike from the RBA by early 2018.

Central bank hawkishness is back in fashion, thanks in part to Donald Trump’s free-spending fiscal plans.

This chart from the Commonwealth Bank’s rate strategy team tells the story. It shows Australian overnight index swaps (OIS) pricing — essentially where traders think the RBA cash rate will sit in the future.

“Rate cut expectations have evaporated to just 5bps (20% chance of a 25bp cut) in 2017, and 2018 is now pricing in the risk of rate hikes,” say Jarrod Kerr, Kevin Xie and Adam Donaldson strategists at the CBA.

“We don’t expect the RBA rate hikes as early as 2017, or early 2018. Commodity prices should limit a market intent on moving further. But momentum is clearly towards a continued sell-off, and until the RBA say otherwise, hikes are likely to stay.”

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