Australia, NZ dollars hit pause as bond markets punished

SYDNEY: The Australian and New Zealand dollars took a step back on Tuesday as an uber-hawkish outlook for US interest rates hammered bond markets and sent local yields lurching to three-year peaks.

The Aussie drifted off to $0.7390, after topping out at $0.7424 overnight. Support lies around $0.7380 and $0.7300 with resistance at a recent four-month top of $0.7440.

The kiwi edged down to $0.6875, having peaked at $0.6922, but found support under $0.6870.

Yet the Aussie still reached another four-year top on the yen at 88.49 and was gunning for resistance at 89.00.

While Japanese yields are pinned around zero, Australian bonds moved in lock-step with a huge increase in US yields as the Federal Reserve flagged the risk of one or more outsized rate hikes of 50 basis points.

Yields on Australian 10-year debt surged 13 basis points on Monday alone to reach 2.685%, heights last visited in late 2018. While local two-year yields have also shot up they have lagged far behind the shift in Treasuries so that the spread has widened to -64 basis points from -32 basis points a couple of weeks ago.

Investors also rushed to price in more rate hikes from the Reserve Bank of Australia (RBA) with rates now seen at 1.5% by year end, compared with 1.0% just a few weeks ago.

A first move to 0.25% is fully priced for June amid talk the RBA could drop its “patient” promise on policy at the April board meeting given surprising strength in the labour market.

Such an aggressive tightening would be a serious shock for borrowers who have not seen a rate rise since 2010.

The mood has already been darkened by the war in Ukraine and a rising cost of living.

Australian dollar carried to 4-month highs on commodity wave

A survey from ANZ out on Tuesday showed consumer confidence dived 4.8% last week to 18-month lows while inflation expectations for two years ahead climbed to 6.0%.

“The weakness in sentiment is at odds with the strength in employment and reflects pressure on household budgets as nominal wage growth lags the jump in inflation,” said David Plank, ANZ’s head of Australian economics.

“The weakness in consumer confidence presents a growing near-term risk to the outlook for household spending.”