Australia, NZ dollars on a roll as markets pare back rate peaks

SYDNEY: The Australian and New Zealand dollars held near multi-week highs on Friday as a slowdown in U.S core inflation reinforced the case for smaller rate hikes across the developed world, extending a rousing rally in bond markets.

The Aussie was enjoying the view at $0.6970, having climbed 0.9% to a fresh five-month high of $0.6984. This would be its fourth straight week of gains and sets up a test of an August top of $0.7009.

The kiwi dollar stood at $0.6389, after touching a new one-month top of $0.6416 overnight. Its bull target remains a high from December at $0.6513.

Markets were celebrating a cooling in US core inflation which saw its three-month annualised rate drop to a 15-month low of 3.1%.

The measure of core service inflation excluding rents favoured by Federal Reserve Chair Jerome Powell also slowed to just 1.2% annualised.

“Inflation is easing in the US, with markets taking that as a sign that the Fed will be able to pause, and that as the economy starts to react to the monetary tightening put into place, the Fed will cut rates in the second half of the year,” said Tapas Strickland, head of market economics at NAB.

That in turn would lessen pressure for further aggressive tightening from the Reserve Bank of Australia (RBA) and futures shifted to imply a peak for the 3.1% cash rate around 3.73%.

A week ago that was around 4.0%. Bond markets reacted by taking Australian 10-year bond yields down to 3.53%, a drop of 51 basis points in just the past two weeks.

Two-year yields sank to 3.11%, almost matching the overnight cash rate. New Zealand two-year swap rates dived 16 basis points overnight to 5.00% as investors wagered the Reserve Bank of New Zealand (RBNZ) would stop short of its current rate projection of 5.5%.

Also helping the Aussie were further reports China had eased restrictions on Australian coal imports, which should be a positive for trade as the Asian giant rapidly reopens.

Australia, NZ dollars edge higher with much riding on US CPI

“The longer-term risk of a steep rise in the demand for Australian exports, compounded with the thawing of the China-Australia trade relationship, is significant and we think worth having some exposure to,” said Adam Cole, an analyst at RBC Capital Markets.

“AUD is, of course, most exposed to China through external trade and is widely used as a G10 China-proxy,” he added.

“We suggest building longer-term upside exposure to AUD crosses through options.”