Australia, NZ dollars fade from highs, bonds keep rallying

SYDNEY: The Australian and New Zealand dollars took a step back on Friday after a steep fall in European bond yields ended up benefiting the US dollar overall, while also extending a bull run in local debt markets.

The Aussie retreated to $0.7067, having hit an eight-month top of $0.7158 on Thursday. Support comes in at $0.7065 and $0.6984, while the next major bull target is a $0.7283 high from June last year.

The kiwi dollar faded to $0.6470, having also touched an eight-month peak of $0.6537 on Thursday. Support lies around $0.6450 and $0.6415, with major resistance at $0.6576.

The retreat came as markets took a dovish view on rate guidance from the European Central Bank and the Bank of England, which slugged the euro and pound and reversed a drop in the US dollar.

A huge rally in European bonds spilled over into local markets with Australian three-year bond futures jumping 11 ticks to 96.960.

New Zealand two-year swap rates fell 15 basis points overnight to a 14-month low of 4.75% as investors wagered there would now be less pressure for much higher cash rates at home.

Markets still assume the Reserve Bank of Australia (RBA) will hike rates by a quarter point to 3.35% at its policy meeting next week, but imply there might only be one more move after that.

A Reuters poll of 31 analysts found 19 expected rates to peak at 3.60%, likely in March, and stay there all year, while futures imply a round of rate cuts for 2024. Gareth Aird, head of Australian economics at CBA, expects a rise of 25 basis points on Feb.7 but saw some risk the RBA could move by 40 basis points to 3.5% and announce a pause in hikes.

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“We think the case to raise the cash rate by 40bp to a conventional metric of 3.50%, coupled with a stated intention to hold the policy rate steady over the period ahead will be on the table,” said Aird.

“If the RBA raises the cash rate by 25bp, as per our central scenario, we do not think they will announce a stated intention to pause,” he added. “Rather they are likely to reiterate that they are not on a pre-set path whist retaining a hiking bias.”

Markets are also wagering the Reserve Bank of New Zealand is now more likely to hike by 50 basis points this month, rather than a super-sized 75 basis points, and to stop at 5.25% rather than 5.5%.