Australia, NZ dollars lose ground again, bonds extend bounce

SYDNEY: The Australian and New Zealand dollars were back on the defensive on Wednesday as global markets resumed fretting about recession risks, though bonds enjoyed a third day of gains.

The Aussie eased 0.3% to $0.6943, having topped out around $0.6995 for two sessions in a row.

Charts show a narrowing wedge that could yield a large move when it breaks, with $0.6985 and $0.7000 the major trigger levels.

The kiwi dollar faded to $0.6297 and looks at risk of moving a lot lower after cracking support at $0.6300.

The Aussie also dipped back to 94.70 yen, running into profit taking from Japanese investors after it jumped 1.4% overnight to as high as 95.41.

Australia, NZ dollars steady after setback, find cushion in ample yield spreads

Minutes of the Bank of Japan’s last policy meeting showed members discussed the yen’s recent rapid decline but decided to stick with super-easy policies.

The spread between Australian 10-year yields and Japanese yields has yawned out by a huge 70 basis points this month to 3.81%, levels last seen in 2011.

Local yields have eased a little after Reserve Bank of Australia (RBA) Governor Philip Lowe all but ruled out a hike of 75 basis points next month, saying the choice would be either 25 or 50 basis points.

Lowe also found it unlikely the 0.85% cash rate would rise as far as 4% by the end of the year, as the market had been predicting.

That triggered a rally in rate futures which now imply rates of 3.38% by Christmas.

Three-year bond yields fell 8 basis points to 3.576% and away from a recent decade high of 3.767%. “Calling a top in bond yields this year has been a perilous exercise,” said Nomura economist Andrew Ticehurst.

“But with the RBA’s communication, current market pricing for aggressive rate hikes, and the risk of recession in a number of countries, we think we are close to the peak in terms of short-end yields.”

He sees the cash rate rising to 3.1% by the end of the year and staying there until the end of 2023, when rate cuts will be on the cards.