SYDNEY: The Australian and New Zealand dollars gave ground on Wednesday as the risk of US interest rates going higher for longer weighed on risk sentiment, though the prospect of yet more hikes at home provided some support.
The Aussie edged back to $0.6949, having been as far as $0.7030 at one stage overnight. Support now lies at $0.6950 and $0.6905.
The kiwi dollar faded to $0.6310, from an overnight top of $0.6389, but has strong chart support at $0.6270.
Both recoiled in the wake of US consumer price figures that suggested inflation was not coming down as quickly as many hoped, prompting Federal Reserve officials to warn that further tightening would be needed.
Still, the outlook was much the same domestically with Reserve Bank of Australia (RBA) Governor Philip Lowe warning rates would have to go higher to cool demand and ensure inflation came down as desired.
The RBA’s recent hawkish turn has seen markets scramble to re-price the risk of several more hikes, with the cash rate, currently at 3.35%, now seen peaking around 4.20% compared to 3.60% a month ago. Analysts are moving the same way.
“We now expect the RBA to lift the cash rate 25 bps (basis points) at its next three meetings with a final 25 bps hike in August, taking the terminal cash rate to 4.35%,” said Prashant Newnaha, a senior analyst at TD Securities.
That was up from a previous forecast of 3.85%. Of the major local banks, Commonwealth Bank, Westpac and ANZ are tipping a peak of 3.85%, while National Australia Bank has lifted its top to 4.10%.
Australia, NZ dollars fade from highs, bonds keep rallying
All this has seen yields on 10-year bonds climb 37 basis points so far this month to 3.76%, keeping the spread with US Treasuries almost even.
Markets also assume the Reserve Bank of New Zealand (RBNZ) has further to go, though it has lengthened the odds of a super-sized hike of 75 basis points at its policy meeting next week.
A survey from the RBNZ out this week showed inflation expectations for two years ahead had eased to 3.3%, from 3.6%, and closer to its target band of 1%-3%.
“The release will help to calm the RBNZ’s nerves about the upside risks for inflation,” said Satish Ranchhod, a senior economist at Westpac. “It looks like the extent of rate increases required to rein in inflation doesn’t need to be as large as the central bank previously anticipated,” he added. “We expect a 50 bp rise at next week’s meeting.”
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