Aussie kiwi on hold as bond yields hit historic lows

28 May, 2019

The Australian and New Zealand dollars held steady on Monday as markets waited on the next developments in the Sino-US trade dispute, while bond yields reached record lows as investors wagered heavily on rate cuts at home.
The Aussie dollar was parked at $0.6931 and above its recent five-month low of $0.6865 - a level that has turned into strong chart support after surviving several tests. Resistance is now lined up at $0.6940 and $0.6960.
The kiwi dollar had inched to $0.6553 and away from last week's seven-month trough of $0.6482.
Both currencies have been pressured, and bonds buoyed, by mounting expectations of falling interest rates.
Just last week, Reserve Bank of Australia (RBA) Governor Philip Lowe said a rate cut would be considered at the next policy meeting on June 4, leading all four of the major banks to tip a quarter-point easing in the 1.5% cash rate.
Futures imply an 84% probability of a cut next week with a move to 1% fully priced by October. The market has gone even further and priced in a real chance of reaching 0.75% by the middle of next year.
"Westpac is now forecasting three cuts in 2019 in June; August and November to push the cash rate from 1.5% to 0.75% and to hold at that level through 2020," said Westpac chief economist Bill Evans.
"While back in February we expected the low in the AUD to be $0.68, we have now shaved that forecast back to $0.66 by end 2019," he added. "This forecast is also predicated on our constructive view on commodity prices and a steady US federal funds rate over 2019."
The bond market is also moving in that direction, with yields on three-year paper hitting a fresh record low at 1.09%, a world away from where they started this year at 1.82%. The 10-year bond future eased back 2 ticks on Monday to 98.4500, but that was from an all-time high.
The Reserve Bank of New Zealand has already cut its rates to 1.5% and markets are wagering on another easing to 1.25% by year-end.
Yields on two-year bonds fell to a record low on Monday at 1.325%, having begun the year at 1.72%.
Some support for the Aussie has come from surging prices for iron ore, Australia's biggest export earner. Chinese futures for the ore climbed almost 5% last week to top $100 a tonne, a huge windfall to miners given the Aussie is also so weak against the U.S currency.

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