Australia, NZ dollars rally for second week, bond yields tumble

SINGAPORE: The Australian and New Zealand dollars were on track for a second straight week of gains on Friday, while bonds celebrated one of their best weeks in months as markets scaled back rate bets. The Aussie was up 0.12% at $0.7001, having climbed 1.1% on the week to reach a six-week peak of $0.7014. The kiwi was up 0.1% at $0.6297, logging a 0.7% rise for the week.

Overnight data in the US showed that the world’s largest economy contracted 0.9% in the second quarter, raising the risk that it was on the cusp of a recession and weighing on the US dollar.

Likewise, the euro zone faces an imminent recession as it continues to battle an energy crisis, undermining the euro.

The single currency was down 1.3% against the Aussie for the week at A$1.4558, and slid nearly 1% against the kiwi.

By far the biggest movers this week were Australian government bonds, as markets scaled back rate hike expectations for the Reserve Bank of Australia (RBA) after inflation data failed to offer any upside surprise.

Yields on three-year bonds have fallen a huge 41 basis points this week to 2.73%, the lowest since late April.

December bill futures are up 35 bps for the week, implying a cash rate of around 3% by the end of this year, compared with a peak of 3.75% back in June.

Goldman Sachs and TD Securities are among houses than have revised down their guidance at next week’s RBA meeting, and now expect the central bank to raise rates by 50bps rather than 75bps.

“The case to move the cash rate by more than 50bp at the August Board meeting is weak.

The Q2 22 inflation data did not surprise to the upside. And whilst the annual rate increased, the quarterly pulse of inflation did not accelerate,” said Gareth Aird, head of Australian economics at the Commonwealth Bank of Australia.

Markets also pared rate expectations after Australian Treasurer Jim Chalmers this week cut the country’s forecast economic growth by half a percentage point for this fiscal year and next, though he also predicted inflation would peak at a very high 7.75%.

Treasury now sees the economy growing 3% in the year to end June 2023, and a sub-par 2% in 2023/24.