Australia, NZ dollars on backfoot as U.S. data bolsters hawkish policy fears

SYDNEY: The Australian and New Zealand dollars were on the backfoot on Friday as U.S. data overnight bolstered hawkish policy fears and lifted the safe-haven dollar, although movements remain largely range-bound ahead of the year-end holidays.

The Aussie was hanging at $0.6687, after easing 0.6% overnight to as low as $0.6650, heading for a flat weekly gain. It now faces resistance at $0.6730, while having support around $0.6650.

The kiwi was hovering around $0.6275, having also slumped 0.7% overnight and heading for a weekly loss of 1.7%. It now faces resistance at Thursday’s high of $0.6330, and has support around $0.6230.

Overnight, data released on Thursday showed the number of Americans filing new claims for unemployment benefits increased less than expected last week, pointing to a still-tight labour market.

A second report also on the same day confirmed that the U.S. economy rebounded in the third quarter after contracting in the first half of the year, and at a pace faster than previously estimated.

While such data would normally be viewed positively, amid the central bank’s tightening phase it fuels investor fear that the Fed funds target rate could rise higher and stay there longer than previously expected, raising the possibility of an economic contraction.

Fed funds futures show investors have priced in a 32% probability of another 50 basis point hike at the February policy meeting next year, slightly up from 28% a day earlier. They still favour a further stepdown to 25 basis point for the Fed in February.

“We think investors are still too optimistic on global growth, and that ‘risky assets’ will struggle over the first half of 2023 as a result,” analysts at Capital Economics said.

“Investors seem increasingly to have come around to our view on inflation over the past couple of months … However, unlike us, investors still seem to expect that this will be achieved without much of a slowdown in growth.

Ten-year Australian government yields were up a whopping 38 basis points on the week to 3.836%, bringing the yield premium over Treasuries back to a positive 15 basis points, the highest since late September.

Three-year yields also surged 20 basis points this week to 3.347%, the highest since mid-November.