Australia dollar struggles as yield premium shrinks, NZ$ holds gains

SYDNEY: The Australian dollar was struggling to stay afloat on Thursday after another rally was swamped by sellers, while its New Zealand counterpart held gains made on the promise of higher interest rates as early as next year.

The Aussie was lying at $0.7734 after running into stiff resistance at $0.7796 overnight, a level that has seen multiple rejections in recent weeks.

It has chart support at $0.7706, but a break would likely see a test of the May low of $0.7675.

The currency failed to get any lift from upbeat data showing business investment jumped 6.3% in the first quarter, well above forecasts of a 2.0% rise.

Dealers pointed a finger at narrowing bond spreads, as Australian 10-year yields have dropped 12 basis points in the past week to 1.59%, shrinking the premium over Treasuries to a meagre 2 basis points.

This was partly attributed to a doggedly dovish Reserve Bank of Australia (RBA) which is expected to reiterate that no tightening is likely before 2024 at its June policy meeting next week.

Analysts also suspect the RBA will formally commit to another round of bond buying at its July meeting.

"Yesterday showed us pretty clearly that as long as the RBA maintains its current yield cure and rates guidance, the A$ will remain capped at $0.7800," said Sean Callow, a senior currency strategist at Westpac.

"On our calculations, the RBA's A$5 billion in weekly asset purchases is driving faster growth in their balance sheet than any other G10 central bank this year."

In market contrast, the Reserve Bank Of New Zealand (RBNZ) shocked many on Wednesday by projecting rate rises from the third quarter of next year, and no less than six hikes by mid-2024.

RBNZ Governor Adrian Orr reinforced the message in a parliamentary hearing on Thursday saying they could start normalising policy from the middle of next year should the economy progress as they expected.

Indeed, the bank projected a hike next year even though it forecast inflation would still be stuck at 1.6%, implying it would be aggressively preemptive in tightening.

The bond market took that outlook badly, with yields on 10-year bonds jumping 10 basis points to 1.91% and threatening a major chart level at 1.93%.

Two-year yields were up at 0.36%, having climbed 6 basis points.

That has left the kiwi dollar up at $0.7290, having hit a three-month top of $0.7316 overnight.