SYDNEY: The Australian dollar was taking a breather on Friday after a wild week saw bond yields dive to eight-month lows as markets wagered the next move in domestic interest rates could be down amid a cooling economy and global banking stress.
The Aussie was stuck at $0.6680, having failed to clear resistance at the 200-day moving average of $0.6758. That left it down a shade for the week and uncomfortably close to chart support around $0.6650.
The kiwi was flat at $0.6245, after running into resistance at $0.6295.
The currency has been pressured by a drastic swing in expectations on the Reserve Bank of Australia (RBA) which has seen the market price out almost any chance of another hike in the 3.60% cash rate. Just a month ago futures had implied at least two more quarter-point hikes to 5.10%.
“We think the RBA is done with rate rises, at least for the moment,” said Paul Bloxham, head of Australian economics at HSBC.
“We see the RBA prioritising a soft economic landing, even if this means above target inflation for a while.”
“However, with inflation expected to be high for some time yet, we do not expect cuts anytime soon.”
The market is not fully priced for a quarter-point cut until December, though with some chance of a move as early as September. Much might depend on what data for retail sales and monthly inflation show next week.
Analyst forecasts generally point to softer readings for both.
Australian dollar tumbles on diverging policy path between Fed, RBA
Bond investors seem all-in for the dovish camp as three-year yields have dived 70 basis points in the past three weeks to reach 2.886% and lows last seen in August.
Yields on 10-year bonds were down almost 13 basis points for the week at 3.279%, having fallen 62 basis points since the US banking crisis first emerged.
Only the 20-year yield is now above the 3.60% cash rate, a phenomenon that historically precedes easing cycles.
New Zealand bond yields have also fallen sharply, though the Reserve Bank of New Zealand (RBNZ) still sounds too concerned about inflation to stop its hiking cycle.
Markets are priced for another quarter-point hike to 5.0% in April, but doubt rates will reach the RBNZ’s projected peak of 5.5%. Likewise, two-year swap futures are down at 4.88%, having fallen 60 basis points in 10 sessions.
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