Australia, NZ dollars up off the floor, bonds get RBA boost

SYDNEY: The Australian and New Zealand dollars crawled up from deep lows on Friday as speculators took profits on short positions, while bonds outperformed after Australia’s central bank sounded less gung-ho on rate hikes.

The Aussie bounced 0.5% to $0.6785, coming off a two-month trough of $0.6699 hit on Wednesday.

That still left it down 0.3% for the week and uncomfortably close to the July trough of $0.66825.

The kiwi dollar also rallied 0.5% to $0.6084, pulling away from its recent 27-month low of $0.5997.

Both had been undermined by economic worries in China and Europe, combined with hawkish stances from major central banks.

The European Central Bank not only hiked key rates by 75 basis points overnight but also flagged several more rises to come, while Federal Reserve Chair Jerome Powell vowed to act strongly against inflation.

That came in contrast to a dovish spin from Reserve Bank of Australia (RBA) Governor Philip Lowe, who opened the door to smaller hikes now that rates have already been raised 220 basis points.

The market reacted by scaling back the chance of another 50-basis-point hike in October, while the peak for rates was now seen around 3.67% compared to 3.85% early in the week.

Australia, NZ dollars slide as concerns about global growth mount

“We assess Lowe’s remarks as being consistent with the RBA downshifting to 25bp rate increase increments, and lifting the cash rate by only 25bps in October and November,” said Tapas Strickland, head of market economics at NAB.

“Thereafter there is a clear case for the RBA to pause for some time as it assesses the impact from the considerable and rapid tightening to date.” Economists at CBA also see 25 basis points in October and then only one more move this cycle to 2.85%.

Analysts at ANZ reckoned the RBA would still go 50 basis points next month and then slow to quarter point moves.

“We acknowledge that there is a considerable risk that the RBA could slow its hiking to 25bp in October, in which case we would expect an additional 25bp hike early next year, leaving the terminal rate at 3.35%,” said Adelaide Timbrell, a senior economist at ANZ.

The RBA’s dovish tone helped Australian bonds outperform, with 10-year yields off 3 basis point for the week at 3.657%. The spread over Treasuries shrank to 33 basis points from 50 basis points at the end of last week.