SYDNEY: The Australian dollar crumbled to fresh 2-1/2-year lows on Wednesday as the rout in UK bond markets spooked investors into the safety of US dollar, while an ongoing slide in the yuan piled on further pressure.
A dazed Aussie was down at $0.6240, having shed almost 2% in just three sessions. The next ledge of chart support is not until $0.5980, a low from April 2020, while resistance is up around $0.6360.
“AUD is still the favoured whipping boy whenever risk assets sell off, making it hard to have confidence the lows are close to have been seen,” said Ray Attrill, head of FX strategy at NAB.
The kiwi dollar lay at $0.5562, after touching overnight the lowest since March 2020 at $0.5536.
The next stop is the 2020 trough of $0.5469 and a break would take it to depths not seen since 2009 and the global financial crisis.
Both of the commodity currencies were hit by a downgrade to the global economic outlook from the IMF that said countries representing a third of world output could be in recession next year.
A run of weak Chinese data coupled with the steady decline in the yuan added to pressure on the Aussie, which is widely used as a liquid proxy for yuan selling.
The rout in British gilts has further spooked investors amid speculation some UK pension funds will need to sell hundreds of billion of pounds of assets to cover margin calls, despite efforts by the Bank of England to calm markets.
The spike in gilt yields and fears of spreading financial instability has seen Australian 10-year bond yields surge 33 basis points in four sessions to reach 4.0%.
Foreign currency exchange companies short of Australian dollar
All this global uncertainty has reinforced wagers the Reserve Bank of Australia (RBA) will again only hike rates by 25 basis points in November, with a small chance they could pause altogether.
Speaking on Wednesday, RBA Assistant Governor Luci Ellis reiterated the nominal neutral level for rates was at least 2.5%, compared to the current 2.6%, with various measures favoured by the RBA producing an average of 3.5%.
“Given the RBA’s assessment that the cash rate remains somewhat below the range of estimated nominal neutral rates, we continue to expect the RBA to hike rates over the coming months to a cycle peak of 3.6%,” said Goldman Sachs economist Andrew Boak.
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