SYDNEY: The Australian and New Zealand dollars were heading for their best week of the year on Friday as investors rushed to price in an end to US rate increases, sparking a major recovery in badly beaten bond markets.
The Aussie hit a one-month peak at $0.6895, having so far climbed 2.9% in its biggest weekly gain since last November.
A break of the June top at $0.6900 would open the way to bull targets at $0.7030 and $0.7158. Its kiwi counterpart reached a five-month high of $0.6406 , having now surged 3.1% for the week so far.
The next target is a February peak at $0.6536. Both have been swept higher as a surprisingly soft reading on US inflation led markets to bet the Federal Reserve would only hike once more.
Indeed, futures now imply at least 125 basis points of easing over 2024.
Investors have also reined in expectations for the likely peak in Australian rates to 4.4%, from 4.6% a couple of weeks ago, but have hardly any easing priced in for 2024.
Rates are at 4.1%, having risen 400 basis points in little more than a year.
Adam Boyton, head of Australian economics at ANZ, now doubts the RBA will increase at all.
“That reflects an assessment of the economy based on a deterioration in forward-looking labour market indicators, good news on the global inflation front and increasing anecdotal evidence that the most recent rate hikes have had an impact on consumer behaviour,” said Boyton, in a change of view.
Australia, NZ dollars rally as markets look ahead to US rate cuts
“While it’s possible the RBA could hike in August, on balance we think an extended pause at 4.1% is now most likely.”
Markets currently imply a 71% chance of a steady outcome in August, but are still priced for one more hike by December.
There was little reaction to news RBA Governor Philip Lowe would be replaced in September by his deputy Michele Bullock, who analysts see as a safe pair of hands.
Across the Tasman, the Reserve Bank of New Zealand (RBNZ) also sounded dovish when it held rates steady at 5.5% this week, saying policy was restrictive enough to restrain inflation.
Markets now imply a better-than 70% chance that the tightening cycle has ended, but again only have about 50 basis points of easing pencilled in for next year.
The change in mood has seen two-year swap rates dive 29 basis points this week to 5.41%, well away from the recent peak of 5.7375%.
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