Australia dollars stuck in lockdown rut, NZ$ gets yield lift

SYDNEY: The Australian and New Zealand dollars continued to play second fiddle to the US dollar on Wednesday, though a sharp divergence in the fortunes of their domestic economies was favouring the kiwi for now.

The Aussie was flat at $0.7345, having dipped as far as $0.7316 overnight, but faces resistance at $0.7364 and $0.7406. Major support lies at the July trough of $0.7290 and a break would take it to the lowest since November last year.

The kiwi dollar edged up to $0.7009 and off an overnight low of $0.6965. It lies in the middle of a broad $0.6882/$0.7105 range that has lasted for almost 8 weeks now and shows no sign of breaking.

New Zealand dollar buoyant as rate hike seen just days away

That deadlock could end next week when the Reserve Bank of New Zealand (RBNZ) is widely expected to raise interest rates for the first time since 2014.

Indeed, markets are speculating it might even hike by half a point to 0.75% with overnight index swaps pricing in almost 31 basis points of tightening.

"The economy is clearly overheating and the Bank's mandates for both inflation and the labour market are now fulfilled," said Ben Udy, an economist at Capital Economics.

"We therefore expect the RBNZ to hike by 50 basis points on August 18 and to 1.50% by the middle of next year."

Two-year swap rates are already up at 1.30% while two-year bond yields are trading 75 basis points above US yields at 1.0%.

In Australia, the economic recovery has been upended by the Delta variant with Melbourne on Wednesday forced to extend its lockdown by another week and Sydney no nearer to opening.

Economists at NAB estimate retail sales nationally fell an eye-watering 3.3% in July as many services sectors shut down, while consumer sentiment for early august hit a one-year trough in a Westpac survey.

"Q3 GDP will clearly be negative, with the focus now on how quickly the economy can rebound in Q4," said NAB chief economist Alan Oster.

"While the current vaccination trajectory should get Australia to 80% of adults vaccinated before the end of the year, there is clearly a difficult period ahead."

As a result, the Reserve Bank of Australia (RBA) is still signalling no hike until 2024 and bond buying out until at least November.

That has seen local bonds outperform Treasuries so that 10-year yields traded as much as 15 basis points below those in the US, the biggest negative spread since March 2020.