Australian dollar suffers setback, yields spike to 15-year peak

SYDNEY: The Australian and New Zealand dollars came under pressure on Friday as a spike in oil prices slugged risk assets and convinced investors that more rate hikes were now inevitable globally.

Fears of higher-for-longer inflation led markets to price in a 90% chance the Reserve Bank of Australia would lift rates later this month, shoving bond yields to 15-year peaks.

“In our view, the RBA needs to hike further to get on the front foot of inflation, so we now expect two more hikes this year, lifting our terminal rate forecast to 4.85%,” said Josh Williamson, head of Australian economics at Citi.

“The market is underpricing the risk of back-to-back RBA hikes, which we believe are necessary to control inflation,” he added. “Consequently, we also push our first rate-cut forecast out to Q4 2027.”

Swaps are currently pricing in 33 basis points of rate hikes by November and 40 basis points for December, though those expectations could rise further if the Reserve Bank of Australia raises its cash rate from 4.35% at its September 29 meeting.

Bond markets reacted sharply, with three-year yields jumping 18 basis points to 5.050%, while 10-year yields climbed to 5.256%, their highest levels since mid-2011.

Investors also ramped up wagers that the US Federal Reserve will raise rates at its meeting next week, providing broad support for the US dollar.

The Aussie was flat at $0.7161, after sliding 0.8% overnight and pulling back from a four-month high of $0.7238.

Initial support is seen at $0.7122, while major resistance lies at $0.7277.

The kiwi dollar was hanging on at $0.5811, after losing 0.7% overnight to hit a six-week low of $0.5795.

Major support comes in at $0.5762, with resistance around $0.5900.

New Zealand debt also took a beating as 10-year yields jumped 13 basis points to 5.055%, its highest since late 2023.

The key 2-year swap rate surged 21 basis points to 4.024%, as investors bet the Reserve Bank of New Zealand would be forced to tighten more aggressively.

The central bank this month had projected just one or two more quarter-point increases in the 2.75% official cash rate, while markets are now priced for four.