Australia, NZ dollars lean on yield support amid market tremors

SYDNEY: The Australian and New Zealand dollars clung to support on Friday as a selloff across global stock and metals markets undermined risk sentiment, with a positive yield premium providing a much needed prop.

The Aussie was a shade firmer at $0.6934, having slipped 1.0% overnight.

The pullback took the Aussie away from the recent three-year top of $0.7094, while a break under $0.6900 would risk a retreat to $0.6766.

The kiwi dollar held at $0.5952, after losing 0.9% the previous session.

That brought losses for the week to 1.1% and left the kiwi well short of its recent peak at $0.60925.

The setback erased Aussie gains made early in the week when the Reserve Bank of Australia hiked its cash rate a quarter point to 3.85% and left the door open to further tightening if inflation stayed stubborn in coming months.

Appearing before lawmakers on Friday, RBA Governor Michele Bullock reiterated that higher rates were needed to slow the economy and bring demand back into line with limited supply.

That left Australian 10-year bond yields not far from a two-year top at 4.813%, and 62 basis points above Treasuries.

Markets imply around a 70% chance rates will rise to 4.10% at the RBA’s May meeting, following inflation data for the first quarter due in late April. Investors put only a 50% probability of a further move to 4.35% by year end.

“Given the resoluteness of the recent hawkish pivot in the RBA’s reaction function, we continue to expect a 25bp hike in May to 4.10%,” said Andrew Boak, an economist at Goldman Sachs.

“We expect this will mark the end of a modest tightening cycle, given our relatively more optimistic view on the economy’s supply capacity.”

In New Zealand, an unexpected rise in unemployment to a decade-high this week led markets to push out the likely timing of a first hike in the 2.25% cash rate.

A hike is not fully priced until October, with September implied at around a 70% chance.

The Reserve Bank of New Zealand meets on February 18, which will be the first for its new governor Anna Breman.

It will also release updated projections for the economy and rates and analysts will be keen to see if it sticks to mid-2027 as the timing for a first rate rise.