NZ dollar extends rate rally, Australia bonds outperform

SYDNEY: The New Zealand dollar extended a post rate-hike bounce on Thursday and dragged its Australian cousin along for the ride, while Australian bonds consolidated having outperformed all comers early in the week.

The kiwi dollar rose 0.6% to $0.5770, and away from the recent 2-1/2 year trough of $0.5565.

Resistance now lies around $0.5805, with support at $0.5680.

The Aussie lagged a little at $0.6510, but again was edging away from last month’s low of $0.6363. Resistance lies between $0.6526 and $0.6547, with support at $0.6435.

The Aussie had less luck on the kiwi, easing to NZ$1.1273 in the wake of Wednesday’s hawkish half-point rate rise to 3.5% from the Reserve Bank of New Zealand (RBNZ).

The central bank showed scant sign of slowing the pace of hikes and even considered moving by 75 basis points, reinforcing market pricing for a peak of 4.5%.

“The RBNZ’s statement threw cold water to an imminent pivot,” said Prashant Newnaha, a senior strategist at TD Securities, who now expects the central bank will lift the projected peak for rates from 4.1% at its meeting next month.

New Zealand dollar perks up after hawkish RBNZ, Aussie slips

“We anticipate the Board forecasting a 4.50% cash rate by mid-year but question if the Bank considers a move to 4.75% in their forecasts. The risk is to the upside.”

That was in marked contrast to the Reserve Bank of Australia (RBA) which surprised early in the week by shifting down to a quarter-point rate hike and emphasised global and domestic uncertainties.

That saw markets sharply scale back expectations for further hikes, with 25 basis points seen in November and a peak around 3.8% compared to 4.00% just a week ago.

Yields on three-year bonds are down a sharp 26 basis points on the week so far at 3.37%, steepening the curve.

Ten-year bond yields have fallen 17 basis points and shrunk the spread over Treasuries to just 4 basis points, the smallest since February.

“We judge that the AU rates market received a major surprise from the RBA, and the unwind of bearish rate and curve flattening positions most likely has further to run,” said Andrew Ticehurst, an economist at Nomura.

“We now estimate a terminal RBA cash rate of 3.60% - was 3.85% - that is achieved around May rather than February.”