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SYDNEY: The Australian and New Zealand dollars were on a roll on Thursday as an uber-hawkish outlook for New Zealand rates and bond yields contrasted with talk of slower US hikes, propelling both currencies through major chart barriers.

The Aussie was up at $0.6750, having rallied almost 1.3% overnight to be comfortably distant from the $0.6585 low hit early in the week.

The next barrier is this month’s $0.6797 peak, and a break would open the way to its 200-day moving average at $0.6938.

The kiwi dollar reached three-month highs at $0.6254, after jumping 1.5% overnight and cracking resistance at $0.6204.

That took it tantalisingly close to a bullish break of the 200-day moving average at $0.6301.

Both benefited from a retreat in the US dollar as markets focused on the prospect of slowdown in rate hikes from the Federal Reserve.

That was in stark contrast to the Reserve Bank of New Zealand (RBNZ), which stunned markets on Wednesday by not only hiking 75 basis points but also projecting another 125 basis points of tightening to come.

The projected peak for rates was jacked all the way up to 5.5%, a huge lift from the previous 4.1%, and markets quickly shifted to price all of that in.

Bonds were particularly hard hit, with two-year yields spiking 35 basis points on the week to 4.63%, which put them 40 basis points above 10-year yields.

New Zealand dollar pops higher on hawkish RBNZ; Aussie slides

That left the yield curve at its most inverted since the 2008 global financial crisis, a sign investors clearly believed the RBNZ when it said a recession would be needed to bring inflation back to target.

“Make no mistake, the RBNZ is not just signalling a recession; it’s forecasting a downturn on a similar scale to the Global Financial Crisis – different causes, but similar consequences,” said Michael Gordon, acting chief economist at Westpac NZ.

He expects the RBNZ to hike by another 75 basis points at its next meeting in February and by 50 basis points in April.

“But, for the first time in a while, we’re also thinking about the risk that the RBNZ could end up overcooking it on the inflation front,” Gordon added. “We now expect rate cuts to begin in early 2024, six months earlier than we did previously.”

The market also took the RBNZ’s aggressiveness as a sign the Reserve Bank of Australia (RBA) might have to get more hawkish with its policy.

Futures nudged up the expected peak for RBA rates to 3.86%, from 3.70% early in the week and a full point above the current 2.85%.

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