Australia, NZ dollars below week's highs as rate frenzy favours US$

SYDNEY: The Australian and New Zealand dollars looked deflated on Friday, having been dragged from multi-month peaks as markets pumped up pricing for US interest rate hikes. The Aussie traded at $0.7477 after failing to hold a 10-month top of $0.7661 hit early in the week.

Its 0.3% loss for the week meant it was still one of the better performers against a broadly strong US dollar.

The kiwi eased 0.5% for the week to $0.6880 and away from a five-month high of $0.7034.

The fall below the 200-day moving average at $0.6909 risked a break of support at $0.6865.

The Aussie fared better on the crosses, gaining 0.9% for the week on an ailing Japanese yen, while the euro shed 1.4% against the Australian currency and touched a five-year low at A$1.4312.

The frenzy of speculation about higher interest rates globally saw Australian 10-year yields top 3.0% on Friday for the first time since July 2015.

Yet that still lagged the move in Treasuries, leaving the spread at 31 basis points, compared with a top of 50 basis points in March.

Markets fully expect the Reserve Bank of Australia (RBA) to lift its 0.1% cash rate to 0.25% in June and to reach 1.75% by year-end and 3.25% by late 2023.

Australia, NZ dollars left behind as Fed seen going hard on rates

If correct, that would be the most aggressive tightening cycle since the RBA adopted inflation targeting in the early 1990s.

The focus now shifts to the Reserve Bank of New Zealand (RBNZ), amid talk it might hike by a full 50 basis points at its policy meeting next week.

"We expect the RBNZ Board will conclude the upside risks to inflation from the Ukraine/Russia war surpass the downside risks to growth, warranting 50bps hikes in April and May," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities.

"The 'path of least regrets' demands aggressive action to ensure inflation expectations do not rise persistently above target."

The market is almost fully priced for a move to 1.5% next week, and favours 25 basis points in May.

Rates are seen reaching 3.25% by Christmas, a level not visited since July 2015.

Two-year swap rates have already reached 3.57% and trade above 10-year bond yields at 3.48%, suggesting the market sees the risk of a sharp economic slowdown ahead.