SYDNEY: The Australian and New Zealand dollars struggled for direction on Monday amid thin liquidity, although their near-term fate is almost entirely riding on the size of the US rate cut this week, with bets of a large half-point move boosting bonds.
Holidays in China, Japan, South Korea and Indonesia made for thin conditions.
The Aussie held at $0.6707, having finished last week with a modest gain of 0.5%.
It failed to breach the 21-day moving average of around $0.6730 on Friday, largely due to a 1.0% drop against the Japanese yen.
The kiwi dollar was also flat at $0.6157, after ending last week 0.3% lower.
It fell 0.4% on Friday, also driven by weakness against a surging yen, which proved to be the major beneficiary of the pullback in the dollar.
Odds are narrowing for the Federal Reserve to kick start its easing cycle with a 50 basis point cut on Wednesday, with a 59% probability priced in for such a move, after media reports revived the prospect of a more aggressive easing.
If the Fed cuts by 50 bps and global equities rally, the Aussie dollar can rebound to 68 cents, said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia.
“A 50 bp cut that scares markets about US economic prospects could increase the USD because it is a safe haven currency,” said Capurso.
Australia, NZ dollars find support as risk sentiment steadies
“However, a 50 bp cut that eases concerns about US economic prospects could undermine the USD.”
Tracking the leg lower in Treasury yields, Australia’s three-year bond yields fell 3 bps on Monday to 3.390%, hovering just above a 14-month low of 3.366% hit last month.
Ten year yields hit a 15-month low of 3.814% on Monday.
New Zealand two-year yields dropped 5 bps to 3.85%, the lowest since September 2022.
In other news, economic data from China - the two antipodeans’ biggest trading partner - over the weekend disappointed, keeping sentiment fragile.
Industrial output growth slowed to a five-month low in August and while retail sales weakened further.
Looking ahead, New Zealand will publish the second-quarter gross domestic product data on Thursday and economists expect the economy likely shrank 0.4% in the quarter, justifying the aggressive rate cuts to come.
Swaps imply a possibility of two 50 bp cuts in October and November, with a total of 85 bp easing priced in. Australia will release the jobs data for August on Thursday.
The data series have been smashing expectations in recent months, and economists expect the labour market to have added another 30,000 jobs, with the unemployment rate holding steady at 4.2%.
The job strength is one reason that swaps only imply an 84% probability of a first rate cut from the Reserve Bank of Australia by the end of the year.
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