Australia, NZ dollars under pressure, test depth of support

SYDNEY: The Australian and New Zealand dollars were on the defensive on Thursday after the Federal Reserve offered a relatively hawkish outlook on US rate increases, and as investors wait anxiously for news on the China Evergrande saga.

The property developer is due to pay interest on one of its dollar bonds on Thursday, and a default might trigger another round of global risk aversion.

The Aussie is often used as a liquid proxy for China risk and would most likely come under pressure in the event of a default.

For now, the currency is holding at $0.7232, having repeatedly found bids under $0.7220. A break there would be technically bearish and open the way for a retreat to the August trough of $0.7107.

The kiwi dollar was testing support at $0.6990 and a breach could unleash a retracement to at least $0.6950.

Both lost ground when the Fed confirmed tapering would most likely begin this year and, more important, end around the middle of 2022, which was sooner than some had thought.

The end of tapering is a precondition for increasing rates, so the timing encourage market wagers for a rise in late 2022 and pushed short-term US yields higher.

In contrast, the Reserve Bank of Australia (RBA) says it is unlikely to raise rates until 2024. As a result, local two-year bond yields are pinned at just 0.02%, a hefty 22 basis points below comparable US debt.

Australian 10-year bond yields dipped to 1.24%, putting them 6 basis points below Treasuries.

That spread is only going to get wider if the RBA sticks to its 2024 timing, while a Fed increase gets nearer and nearer. Indeed, on current pricing US rates could be at 1% by late 2023 while Australia is still at 0.1%.

"We consider markets are under-pricing the Fed tightening cycle," warned CBA international economist Carol King.

"We have been arguing that US underlying inflation is more elevated than the traditional inflation measures suggest," King added. "Accelerating employment costs may disprove the Fed's long-held assumption of transitory inflation."

The Reserve Bank of New Zealand (RBNZ) is set to be even more aggressive, with a first hike almost certainly coming next month and another likely in November.

The bank on Thursday took fresh steps to cool the property market by tightening home loan rules for banks.