SYDNEY: The Australian and New Zealand dollars got a lift from strong local data on Wednesday as markets counted down to a widely expected US rate hike, while bonds copped a kicking.
The Aussie crept up 0.3% to $0.7116, and a little further away from its recent three-month low of $0.7030.
It needs to clear resistance at $0.7148 to extend the bounce.
The kiwi dollar firmed slightly to $0.6452, but remained uncomfortably close to the recent two-year trough of $0.6413.
Investors fully expect the Fed to raise rates by 50 basis points to 0.75-1.0% later Wednesday and have already priced in rates of 2.0-2.25% for July, so they need policymakers to keep sounding hyper-hawkish.
That aggressive pricing has so far overshadowed this week’s move by the Reserve Bank of Australia (RBA) to lift rates by 25 basis points to 0.35%.
The market also now doubts the bank will move to 0.75% in June, seeing more chance of another quarter point rise to 0.60%. Yet futures still imply rates of 3% by the end of the year, so investors assume it will speed up at some stage.
“The hawkish shift in the RBA’s reaction function points to a faster pace of policy normalization in 2022,” said Andrew Boak, an economist at Goldman Sachs Australia. “We now expect the RBA to lift rates to 2.6% by December 2022 - previously 1.75% - and lean towards the normalization being front-loaded via back-to-back 50bp hikes in June/July and a series of monthly 25bp increases from August to December.”
The case for rapid-fire moves got some support from domestic data on Wednesday showing retail sales jumped 1.6% in March, outpacing forecasts for a third straight month.
Jobs data in New Zealand were also upbeat with unemployment holding at record lows of 3.2% and wages hitting a 13-year high, encouraging investors to price in yet more tightening from the Reserve Bank of New Zealand (RBNZ).
“A lack of liquidity and one-sided trading have seen some chunky moves higher in yields,” said Jarrod Kerr, chief economist at Kiwibank. “We still expect the RBNZ to deliver a 50bp hike at the May 25 meeting, taking the cash rate to 2%. We see the RBNZ then keep lifting the cash rate to 3% by November.”
Two-year swap rates jumped 11 basis points on the data to 3.97%, the highest since late 2014.
The yield on 10-year New Zealand bonds also leapt 11 bps to 3.828%, while across the Tasman, three-year Australian government bond futures dived 11.5 ticks to 96.720, a decade low and 10-year futures fell 14.5 ticks to 96.415.