NZ dollar hits 2-1/2-month low on hawkish Fed bets; Aussie helped

SYDNEY: The New Zealand dollar hit a 2-1/2-month low on Tuesday as mounting wagers on US interest rate hikes boosted the greenback broadly, though the Aussie drew some carry demand amid its own yield advantage.

The kiwi dollar fell 0.2% to as low as $0.5702, setting it up for a fifth straight session of declines.

The next bear target is $0.5681, which is the lowest since November.

The Australian dollar also eased 0.2% to $0.6990, after slipping 0.2% overnight. Support appears to be holding at $0.6979, but the Aussie remained well off its May peak of $0.7277.

The two currencies have struggled as a hawkish swerve from the Federal Reserve saw markets fully price in a rate hike by September, but the kiwi has been hit particularly hard.

That was partly due to its weakness against the Aussie, which has been steadily climbing against its Antipodean peer and last hovered at NZ$1.2251, not far from a 13-year peak of NZ$1.2284.

“In an environment where you have super-low FX volatility and we’re entering into the kind of northern hemisphere summer doldrums, … that sort of plays to the high-yielding G10 currencies probably performing well,” said Ray Attrill, head of FX strategy at National Australia Bank.

“That identifies the Aussie basically, certainly relative to the kiwi, as an attractive carry.”

Analysts say the kiwi’s drop may be the result of hedge funds that piled into bullish bets last month after the Reserve Bank of New Zealand’s hawkish turn being stopped out as the US dollar climbed.

The RBNZ is widely expected to raise the 2.25% cash rate by a quarter-point at its policy meeting in July, with markets wagering rates will reach 3.35% by the end of next year.

The Reserve Bank of Australia is seen holding rates steady at 4.35% in August, and markets bet there is a split chance of a hike to 4.6% by the end of this year.

Australian bonds have outperformed US debt, with local 3-year yields down 2 basis points at 4.428%.

That has narrowed the spread over Treasuries to 20 basis points, from a peak around 97 basis points in March.

New Zealand bonds have also outperformed US peers, with 10-year yields down at 4.465%.

That has flipped the spread with Treasuries to negative 4 basis points.

They had paid as much as 57 basis points more back in March.