SYDNEY: The Australian and New Zealand dollars were deep under water on Tuesday as shockwaves from the May US inflation report hammered risk assets and caused the largest rise in local bond yields since the global financial crisis of 2009.
“A hot US CPI report and signs of inflation expectations de-anchoring has seen yields surge, risk assets sell off, and recession talk rise,” said Tapas Strickland, a director of economics at NAB.
“Should global growth risks rise further, it is likely the AUD will come under further pressure with the correlation with S&P500 futures re-asserting itself.”
The Aussie was already down at $0.6931, having shed 1.7% overnight to a one-month low of $0.6911.
The loss of support around $0.7030 was bearish for a test of the May trough at $0.6829, which had been the lowest since mid-2020. The kiwi dollar sagged to $0.6260, after losing 1.5% overnight to also hit a one-month low at $0.6248.
Australia, NZ dollars suffer collateral damage in equity implosion
Support now lies at the May trough of $0.6219 and a break could open the way to $0.5900.
Markets are wagering the US Federal Reserve will hike rates by a drastic 75 basis points on Wednesday, putting pressure on other central banks to follow.
Goldman Sachs is now tipping 75 basis point moves at both June and July meetings, and rates at 3.25-3.5% by year end.
Investors have also shifted to price in half-point hikes from the Reserve Bank of Australia (RBA) in July, August and September and a rate as high as 3.5% by Christmas.
Yields on three-year bonds surged 35 basis points on Tuesday to 3.61%, catching up to Treasuries after a local holiday on Monday in the largest single move since 2009.
Ten-year bond yields jumped 31 basis points to 3.975% and heights not seen since 2014.
Over in New Zealand, the market is wagering on at least four more increases of 50 basis points this year and rates above 4.0% by early 2023.
A survey of Australian businesses for May out on Tuesday showed activity had been holding up well. However, steep losses in equities and a downturn in house prices have darkened the consumer mood and threaten to crimp growth on both sides of the Tasman.
“As we look to 2023, we must incorporate higher interest rates, a falling housing market, and a moderation in spending,” said Jarrod Kerr, chief economist at Kiwibank.
“Although we forecast below-trend, but positive, growth into 2023, the probability of a recession grows with every RBNZ rate hike from here.”
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