Australia, NZ dollars nurse painful losses as markets go mad for rate hikes

SYDNEY: The Australian and New Zealand dollars were hunched near multi-month lows on Friday as a flight from risk globally combined with aggressive pricing for US rate hikes to lift the US dollar broadly.

The Aussie was pinned at $0.7036, having shed 1.1% overnight to a two-month trough of $0.7024.

That brought losses for the week to 1.9%, the biggest drop since last August, and suggested a test of the 2021 low at $0.6993 was only a matter of time.

The kiwi dollar also fell 1.1% overnight to sit at $0.6577 , lows not seen since October 2020.

That was the sixth straight session of losses and brought the fall for the week to 1.9%. With support at $0.6590 breached, the next bear targets are at $0.6555 and $0.6512.

Australia, NZ dollars join bond rout as markets price for multiple hikes

The losses come even as commodity prices stayed high and upside surprises in domestic inflation data stoked speculation of faster policy tightening at home.

Analysts are falling over themselves to bring forward the likely timing of a hike from the Reserve Bank of Australia (RBA) following a shock spike in fourth-quarter inflation.

Westpac and CBA are now tipping a first rate rise to 0.25% in August, with NAB looking for November and ANZ still in 2023.

Almost everyone now expects the RBA will end its bond buying campaign at its policy meeting next week, rather than extend it to May, and will have to revise up the outlook for inflation.

Some are even more hawkish.

"We now forecast a first and modest 15bp rate hike in June," said Nomura economist Andrew Ticehurst. "We see the cash rate then rising in 25bp steps, in August and November, ending the year at 0.75%."

That still lags the market, which is fully priced for a move in May and another by July, with rates approaching 1.25% by the end of the year.

Yields on three-year bonds surged 16 basis points this week alone to reach levels not seen since early 2019 at 1.29%, leading to a marked flattening of the yield curve.

"Looking at prior tightening cycles, we expect more bond market weakness and curve flattening," said Ticehurst. "History suggests the peak in yields is unlikely to appear before the first hike."

"Nevertheless, we think AUD bonds are relatively attractive, including for yen-based investors, and are positive regarding State government debt."