SYDNEY: The Australian and New Zealand dollars steadied on Friday as the US dollar juggernaut finally ran into some profit-taking, but both currencies nursed stinging losses for the month with the risk of more to come.
The Aussie was holding at $0.6502 for now, but still down almost 5% on the month and uncomfortably close to the recent 2-1/2 year trough of $0.6364.
The kiwi steadied at $0.5728, having bounced from its recent low of $0.5565, but remains 6.4% down on the month and not far from the March 2020 trough of $0.5469.
Combining with the broad strength of the safe-haven US dollar has been a slide in the Chinese yuan, with investors selling Aussie and kiwi as a liquid proxy for the currency.
“The extent of USD appreciation has exceeded our July expectations, the result of which is the need for a shift higher to our USD forecast profile,” said Ray Attrill, head of FX strategy at NAB.
Australia, NZ dollars give up overnight bounce, bearish trend unchanged
“We now suggest a $0.6250-0.6750 Q4 AUD/USD range, and $0.55-0.60 for NZD/USD.” Bonds have also had a tough month with yields on Australian 10-year paper up 35 basis points in September to 3.97%.
They still managed to outperform Treasuries, however, more than halving the spread premium to 17 basis points.
Focus now turns to a policy meeting of the Reserve Bank of Australia (RBA) on Oct. 5 which is certain to see the sixth straight monthly rate hike as it struggles with inflation.
Rates have already risen 225 basis points and markets are leaning toward another 50 basis points to 2.85%. Market pricing in part reflects hawkish commentary from the Federal Reserve and, more recently, the European Central Bank.
“Some observers argue that the RBA needs to ‘follow the US Fed’ or else the AUD will fall further, boosting inflation,” said Paul Bloxham, chief economist at HSBC.
“However, although the AUD is down 11% against the USD year-to-date, it is up 2% on a trade-weighted (TWI) basis.
The TWI matters more for the inflation outlook.“ Indeed, the Aussie is up on the yen, euro, sterling, yuan and kiwi for the year so far.
This is one reason Bloxham thinks the RBA could pivot to quarter-point hikes in October, while conceding the risk of a larger move is high.
There is a lot less doubt about the Reserve Bank of New Zealand (RBNZ) with the market fully priced for a half-point hike to 3.5% next week, and even some chance of a 75-basis-point move.