Australia and NZ dollars are on the ropes; bonds show some grit

SYDNEY: The Australian and New Zealand dollars were nursing painful weekly losses on Friday as surging US yields buoyed the greenback, while domestic bonds showed some resilience in the face of a vicious global selloff.

The losses came despite markets narrowing the odds on further rate rises, with the Reserve Bank of Australia now considered all but certain to hike by 25 basis points to 4.60% at its meeting on September 29.

A move to 4.85% is fully priced by February.

“We expect greater resolve from the RBA to get inflation back to target,” said Paul Bloxham, head of Australian economics at HSBC, noting core inflation had been above the midpoint of the 2% to 3% target band for more than four years now.

Data out next week are expected to show core inflation stuck at 3.6%, or a little higher, in August.

“We expect a 25bp hike in both September and November,” Bloxham said. “Our central case sees economic growth close to stalling in Q4 and Q1, with a risk of recession.”

Still, markets are even more hawkish on the Federal Reserve, with a 68% chance of a hike as soon as October and around 90 basis points of tightening priced by the middle of next year.

That shift left the Aussie dollar hanging at $0.7010 , having fallen 0.4% overnight to a seven-week trough.

This brought losses for the week to a hefty 1.6% and threatened support around $0.6923 and $0.6867.

Bonds have also suffered hefty losses on the week, but they did manage to outperform US debt.

While 10-year yields climbed to 5.408%, the spread over Treasuries has almost halved in the last couple of weeks to 22 basis points.

The kiwi dollar wallowed at $0.5659 after easing 0.2% overnight.

That left it down 1.2% on the week for a fifth straight week of losses.

The kiwi is now fast approaching the 2026 low of $0.5627 with major support at $0.5581.

The retreat in both currencies threatens to ramp up import prices and add to inflation, providing yet another reason for central banks to tighten further.

Markets now imply an 84% chance that the Reserve Bank of New Zealand will hike by a quarter point to 3.0% at its next meeting on October 28 and ultimately take rates toward 4.0%.