Australia, NZ dollars pause near multi-month peaks as bond selloff deepens

SYDNEY: The Australian and New Zealand dollars loitered near multi-month highs on Tuesday as a global selloff in bonds kept investors cautious, although domestic economic data offered support at the margin.

Selling across global debt markets saw Australian 10-year bond yields spike 9 basis points to a five-month top of 5.166%, while 3-year futures slid 7 ticks to 95.280.

Treasuries led the rout on concerns about US budget deficits and debt levels, while local markets have also come under pressure from expectations that interest rates may need to remain higher for longer to tame inflation.

Markets now imply a 54% chance the Reserve Bank of Australia will hike rates a quarter point to 4.60% at its meeting on September 29, compared with just 10% a week earlier.

Indeed, the market is even pricing a 40% probability of a further move to 4.85%.

The hawkish outlook comes even as data on net exports and government spending suggested the economy hit the brakes in the second quarter.

The main GDP report is due on Wednesday and analysts forecast a meagre 0.3% rise in the quarter, with annual growth slowing to 1.8% from 2.5%.

Despite the slowdown, core inflation remains stuck at a painfully high 3.6%, pressuring the RBA to deliver a fourth rate hike this year.

“The RBA has no easy choices from here,” argued Paul Bloxham, head of Australian economics at HSBC.

“If the GDP growth print is weak, as we expect, the economy is getting close to stagflation already.”

“If, instead, the GDP print shows stronger than expected growth, the RBA may be forced to lift its cash rate further, increasing the risk of pushing the economy into a recession.”

The Aussie held at $0.7170, after finding bids around $0.7150.

Resistance lies at the recent 15-week top of $0.7208 and the May peak of $0.7277.

The kiwi dollar was flat at $0.5916, having barely budged overnight.

Support lies at $0.5900 and $0.5860, with resistance at the recent three-month top of $0.5988.

Investors remain confident the Reserve Bank of New Zealand will raise its official cash rate 25 basis points to 2.75% on Wednesday, but is less sure what it will flag for further hikes.  

Back in May, the central bank projected rates at 2.80% for December and 3.1% by the end of next year.

Markets are pricing in 3.07% for December and 3.65% by late 2027.