SYDNEY: The Australian and New Zealand dollars steadied above recent lows on Thursday as a sharp fall in US yields sparked a round of short-covering in the beaten-down currencies, while bonds extended gains on hopes of early rate cuts.
The Aussie held at $0.6540, having bounced from a three-month low of $0.6480 overnight.
More support lies around $0.6466, with resistance at $0.6580.
It fared less well against a surging yen, losing 1.8% overnight to hit its lowest since March at 97.35.
The kiwi dollar was up at $0.5954, after rallying 0.8% the previous session and away from its recent three-month trough of $0.5859.
Much of the kiwi’s move came against the Aussie as markets swung to price out any chance of a rate rise from the Reserve Bank of Australia (RBA) following favourable inflation data.
Markets now imply a small chance of a cut at the RBA’s Aug. 6 meeting, compared to a 20% risk of a hike before the data.
They also imply a 44% chance the 4.35% cash rate could be cut as early as November, while a quarter-point easing is priced at 76% for December.
“Given the sub-consensus inflation outcome and the run of other data confirming that domestic demand growth is soft, we affirm our November call for the first rate cut, with more conviction than previously,” said Luci Ellis, chief economist at Westpac.
Australia, NZ dollars vulnerable to volatility as inflation test looms
“We also anticipate that rates will decline only gradually; we currently project that the RBA cash rate target will fall to 3.1% by end-2025.”
Of the other three major banks, CBA also sees a first cut in November, while ANZ is tipping February and NAB not until May.
The shift in outlook saw three-year bond futures hit their highest since mid-April at 96.350, having climbed 31 ticks in two sessions.
Yields on 10-year bonds also dived to the lowest since April at 4.051%.
The prospect of an earlier easing was enhanced by dovish commentary from the US Federal Reserve which led futures to price in an 11% chance it could cut rates by as much as 50 basis points in September.
Across the Tasman, markets imply a 36% chance the Reserve Bank of New Zealand (RBNZ) could cut at its next meeting on Aug. 14, and are fully priced for a move in October. Likewise, key two-year swap rates touched their lowest since late 2022 at 4.13%.
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