Australia, NZ dollars left lagging in the race to higher rates

SYDNEY: The Australian and New Zealand dollars were back on the defensive on Friday after hawkish comments from European and US policy makers spooked equity markets and soured risk appetites.

The Aussie recoiled to $0.7358, having topped out at $0.7458 overnight. The bearish reversal puts the focus on support at $0.7343 and the 200-day moving average at $0.7295.

The kiwi dollar was huddled at $0.6720, after retreating 1% overnight from a peak of $0.6809. Support comes in at the recent seven-week low of $0.6717 and a break would be bearish for a move toward $0.6655.

Both gave up some ground on the euro after ECB vice-president Luis de Guindos said rates could be hiked as early as July, sending EU bond yields sharply higher.

Meanwhile, Federal Reserve officials were confirming the likelihood of a 50-basis point rate rise in May and possibly moving by 75 basis points if needed.

Futures now imply rates would reach 2.00-2.25% as early as July and climb to around 3% by year end.

The hawkishness spilled over into local markets which narrowed the odds the Reserve Bank of Australia (RBA) could lift its 0.1% cash rate in May, rather than June as most expect.

They also implied a better-than-even chance of a half-point hike in June and rates reaching around 2.25% by Christmas.

Much will depend on first quarter Australian consumer price figures due out on April 27 which are expected to show core inflation topping the RBA’s 2-3% target band for the first time since early 2010.

“The CPI data should be pivotal in interest rate markets pricing the RBA’s first rate hike since 2010 - either 15 or 40 basis points in June,” said Westpac forex analyst Sean Callow.

“The Aussie should be on edge for the data, though of course the Fed is set to deliver 50 basis points before the RBA even starts its tightening cycle, keeping a lid on AUD/USD,” he added “Risks remain towards $0.7310/15 in coming sessions.” Analysts noted the chance of a surprisingly high inflation reading looked to have diminished a little after New Zealand’s CPI came in just under forecasts on Thursday. The data had seen debt market rally at first, but that changed overnight amid all the hawkish talk abroad.

As a result, two-year swap rates jumped 12 basis points to 3.685% and heights not visited since early 2015.