Aussie pinned near five-week lows as yield advantages narrow, stocks crumble

SYDNEY: The Australian dollar was pinned near five-week lows on Wednesday as its yield advantages narrowed and global stocks crumbled on fears that war-driven inflation will force central banks to raise interest rates.

The Aussie slipped 0.1% to $0.7098, having dropped 0.9% overnight to a five-week low of $0.7080.

That broke major chart support around $0.7019, which put it way below a four-year top of $0.7277. The kiwi dollar likewise eased 0.1% to $0.5830 after falling 0.7% on Tuesday to a three-week trough of $0.5818.

A break of support at $0.5816 would risk a retreat toward recent lows at $0.5681.

The Aussie was undermined in part by a narrowing in its interest rate advantage as yields offshore have spiked by more than they have at home.

The spread between Australian 10-year debt and US paper has shrunk to the smallest gap this year at 40 basis points, down from 75 basis points a month ago.

Investors have been pricing in more rate hikes abroad while the Reserve Bank of Australia has already lifted rates three times this year to 4.35% and is widely expected to hold rates steady in June.

All eyes will be on Aussie jobs data on Thursday.

According to a Reuters poll of economists, 15,000 new jobs were created in April and the jobless rate likely stayed steady at 4.3%.

Any downward surprises will magnify concerns of a sharp economic slowdown with the RBA already tipping that growth will slow to a subpar rate of 1.3% by the end of the year as the US-Israeli war on Iran clouds the outlook.

Swaps imply a 20% probability that the RBA will lift rates again in June, but a move in August is about 75% priced in.

Rates are expected to peak at 4.6%, with some risk of reaching 4.85%.

Across the Tasman Sea, the Reserve Bank of New Zealand meets next Wednesday and markets imply a 30% chance of a hike in the 2.25% cash rate, though that rises to 90% for July.

“Our best guess is that the committee will use this statement to lay the groundwork for a hike at the next meeting in July, giving fair warning in a transparent fashion, but not pre-commit to that,” said Sharon Zollner, chief economist at ANZ.

“In a world of such extreme uncertainty, flexibility is very valuable.”