Australia, NZ dollars get much-needed bounce, outlook still bearish

SYDNEY: The Australian and New Zealand dollars saw a reprieve from selling pressure on Thursday after a pullback in Treasury yields restrained their U.S. counterpart and sparked a much-needed rally in local bond markets.

The Aussie had crawled up to $0.6355, from an 11-month trough of $0.6286 hit on Tuesday, but was still down 1.6% for the week so far. Resistance lies around $0.6360 with major chart support at its 2022 low of $0.6170.

The kiwi dollar clambered to $0.5931 and away from a low of $0.5871, having just managed to dodge a break of this year’s trough at $0.5860.

Analysts, however, were cautious about calling a turning point for the currencies given U.S. bond yields were only just off 16-year highs.

“We continue arguing to sell any and all strength above $0.6500 in the A$ given the surge in U.S. real yields,” said Richard Franulovich, head of FX strategy at Westpac. “We stick to our long held target of $0.6200.”

He was also bearish on the kiwi, with a target of $0.5800.

Both currencies have been steamrolled by the recent jump in Treasury yields, which has boosted the U.S. dollar across the board and undermined risk sentiment generally.

Bonds did rally a little overnight, aided by a 5% slide in oil prices, which saw Australian 10-year bond yields steady at 4.592% and just under a 12-year high.

The kiwi market also drew some relief from Wednesday’s policy meeting of the Reserve Bank of New Zealand (RBNZ) proved less hawkish than dealers had been betting on.

That led markets to pare back the chance of a rate hike in November and saw two-year swap rates ease to 5.728% from a top of 5.835% earlier in the week.

“The RBNZ’s talk of upside risks near-term, mainly on inflation, give way to bigger downside risks to the economy over the medium term,” wrote Kiwibank chief economist Jarrod Kerr in a note.

Unfortunately for the local currency, the diminished prospect of further hikes was just another headache.

“We still see the Kiwi heading lower from current levels, with $0.5500 waiting at the year-end finish line,” added Kerr. “Falling commodity prices, narrowing interest rate differentials and weakening risk appetite should see it through.”