Australia, NZ dollars drift off

SYDNEY: The Australian and New Zealand dollars were on the defensive on Monday as yield spreads continued to widen in favour of their US counterpart, and investors waited to see how aggressive New Zealand’s central bank would be on rates this week.

The Aussie eased to $0.7447 and away from last week’s 10-month top of $0.7661. Support comes in around $0.7425 and $0.7360.

The kiwi lapsed to $0.6834, leaving behind its recent five-month high of $0.7034. The loss of the 200-day moving average at $0.6907 risks a break of support at $0.6800.

Much depends on whether the Reserve Bank of New Zealand (RBNZ) decides to hike rates by 25 or 50 basis points on Wednesday. The market is wagering heavily on the larger move, so a quarter-point hike would likely see the kiwi retreat further.

Jarrod Kerr, chief economist at Kiwibank, is with most analysts in tipping a quarter-point move.

“If we’re right, and the RBNZ delivers a lighter hand, we expect to see a slight pullback in wholesale interest rates and a short-lived drop in the Kiwi,” he said.

“If we’re wrong, interest rates have a lot further to run, higher, and the Kiwi will be catapulted,” he added. “A decision to hike 50bp in April is likely to be seen as a decision to hike 50bp in May as well, and again in July and August.” Markets are already priced for the current 1% cash rate to reach 3.25% by year end, so the risk is the central bank will not meet such hawkish expectations.

Across the Tasman, markets are more than fully priced for a first hike from the Reserve Bank of Australia (RBA) in June, following a hawkish turn last week.

That will still trail far behind the Federal Reserve, however, which has seen the spread on 10-year bonds over Treasuries narrow to 27 basis points from a top of 50 basis points in March.

“In our view that reflects the market’s endorsement of the RBA’s shift in that, from the markets perspective, there is now more clarity around the RBA’s response function and hence less risk of a policy error,” said Damien McColough, head of rates strategy at Westpac.

“Even so, we would not expect the recent narrowing to continue at pace in coming days, especially given the heavy issuance schedule.” The Australian government is selling a new November 2033 bond on Tuesday, with the market looking for an issue of around A$15 billion ($11.17 billion).