Australia, NZ dollars gain, bonds lose as markets hope for the best on Ukraine

SYDNEY: The Australian and New Zealand dollars edged higher on Wednesday as markets chose to focus on hopeful signs for Ukraine, while bonds were battered by another surprisingly strong reading on U.S. inflationary pressures.

The Aussie stood at $0.7146, after firming 0.35 overnight, but remains well short of last week’s high at $0.7248. Support comes in at $0.7100.

The kiwi dollar reached $0.6639, having gained 0.4% overnight and away from support at $0.6593. Again, it remains a long way from the recent high of $0.6733.

Both were aided by a rally in global equity markets after Russia said it was withdrawing some troops from the Ukraine border, though the pullback was not verified.

The improvement in risk sentiment hit bonds hard, as did a high reading of U.S. producer prices that only added to talk of a half-point rate increase from the Federal Reserve next month.

Local markets are also in a lather, with swaps implying a one-in-three chance the Reserve Bank of New Zealand (RBNZ) could hike rates by 50 basis points at its meeting next week.

It has so far moved in quarter-point adjustment and policy makers have expressed a pretence for a gradual tightening, though recent data has shown inflation and the labour market running a lot hotter than expected.

“It looks to be inevitable that the RBNZ will lift the Official Cash Rate when it meets next Wednesday,” said analysts at ANZ in a note.

“We think the RBNZ will favour steady 25bp lifts, but there is no doubt the central bank has a lot of work to do to rein in inflation, therefore 50bp can’t be completely ruled out.”

While the Reserve Bank of Australia (RBA) continues to insist it is in no hurry to tighten, markets have not only priced in a rise to 0.25% by June but also a 16% chance of an even bigger hike.

Yields on 10-year bonds also extended their recent surge to reach 2.238%, the highest since early 2019 and a rise of 37 basis points in less than two weeks.