SYDNEY: The Australian and New Zealand dollars were celebrating their biggest rally in five months on Thursday as markets wagered on an end to US rate hikes, and even the prospect of rate cuts starting early next year.
Bond yields dived as investors lengthened the odds on further increases in Australian interest rates, with the probability of a move in August now well under 50%.
The US dollar was the main casualty, sending the Aussie to a three-week high of $0.6801 having surged 1.5% overnight for its largest daily gain since early January.
The kiwi dollar hit a two-month peak of $0.6316, after jumping 1.6% overnight, and now targets its May top of $0.6384.
All the gains came after a downside surprise in US inflation data led markets to wager the Federal Reserve would only have to raise rates one more time, and could start easing as early as March next year.
“The Fed’s leadership in the global rate cycle will increasingly play against the US dollar, as central banks pivot from rate hiking to rate cutting,” said Alan Ruskin, a macro strategist at Deutsche Bank. He sees the Aussie reaching $0.7300 and the kiwi $0.6700 by the end of this year.
Australia, NZ dollars rally, ignore dovish news
The prospect of an end to US tightening was seen lessening the pressure for hikes at home, and futures now imply only a 37% chance the Reserve Bank of Australia (RBA) will raise its 4.1% cash rate next month.
The implied peak for rates has dropped to around 4.40%, compared to 4.6% just a couple of weeks ago.
Three-year bond yields slid to 3.99%, a drastic turnaround from last week when it hit the highest since 2008 at 4.297%.
Bonds had already got a boost from comments by RBA Governor Philip Lowe that past hikes were working to cool inflation and he had an open mind on whether more were needed.
The Reserve Bank of New Zealand (RBNZ) also sounded dovish when it held rates steady at 5.5% on Wednesday, saying policy was restrictive enough to restrain inflation.
Markets sharply scaled back the chance of another rate rise and sent two-year swap rates down to 5.42%, from last week’s peak of 5.7375%.
“The RBNZ conveyed increased confidence that a restrictive policy would put inflation on a path to moderate towards the target,” said analysts at JPMorgan in a note.
“Our view remains that the RBNZ will pivot towards rate cuts by year-end.”
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