Australia, NZ dollars suffer collateral damage in equity implosion

SYDNEY: The Australian and New Zealand dollars were licking their wounds on Friday after a selloff in global equity markets slugged risk assets and commodities, snapping several support levels in the process.

The Aussie was back at $0.7100, having retreated 1.3% overnight to shatter support at $0.7140. The repeated failure to clear the 200-day moving average at $0.7253 has turned the outlook bearish for a test of $0.7055.

The kiwi dollar sagged to $0.6382, after losing 1% overnight and breaking support at $0.6423 and $0.6390.

The next stops are $0.6353 and $0.6292. Both of the commodity-heavy currencies have shown a tight correlation to equity markets in recent months, while the US dollar tends to benefit as the most liquid safe harbour.

Even an outsized half-point rate hike from the Reserve Bank of Australia (RBA) this week did not help much. The market is almost fully priced for another rise of 50 basis points to 1.35% in July and rates of 3% by the end of the year.

While most analysts doubt the RBA will be quite that hawkish, the bank does seem keen to get rates to neutral more quickly than previously thought.

Australian dollar looks to extend yield advantage over yen

“We see the RBA getting the cash rate to 2.35% by November –the bottom half of what it currently considers to be the neutral range - six months earlier than we expected,” said David Plank, head of Australian economics at ANZ.

He sees another quarter point hike in February and then a pause to see if the economy reacts to higher borrowing costs given households have a record A$2 trillion in mortgage debt.

“Ultimately we see the RBA taking the cash rate to a restrictive setting of above 3% in late 2023 or early 2024,” he added. “A sustained period of sub-trend growth will likely be required to bring inflation down to the target level.”

The market has rates reaching almost 4% by early 2024, which will then be followed by cuts presumably as the economy slows. Likewise, yields on three-year bonds have climbed to the highest since early 2012 at 3.27%.

That surge has shrunk the spread with 10-year yields to a slim 37 basis points, the smallest since just before the pandemic hit.

That flattening of the yield curve suggests the market thinks the RBA is ready to tighten decisively and so curb inflation, even if that risks an economic downturn.