Australia, NZ dollars on a high as dovish markets drag down US yields

SYDNEY: The Australian and New Zealand dollars scaled multi-month highs on Friday as market wagers on a less aggressive US tightening cycle pulled down Treasury yields and undermined the US dollar.

The Aussie reached a three-month high of $0.6814, having jumped 1.5% overnight to break the previous November top of $0.6797.

That opened the way to a September high of $0.6915 and the 200-day moving average up around $0.6926.

The kiwi dollar climbed to a four-month peak of $0.6322 , after rallying almost 1.6% overnight.

That cleared its 200-day moving average at $0.6289, with the next major target being a high from August at $0.6468.

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The surge came after Federal Reserve Chair Jerome Powell confirmed interest rates were likely to rise at a slower pace in future, though he emphasised there was still work to do on inflation.

Markets were surprised Powell did not push back harder against recent falls in Treasury yields; they took that as a green light to pile into bonds and equities.

Futures lowered the expected peak for Fed rates and priced in larger rate cuts for late 2023, prompting a similar sea change in local markets which had already been encouraged by a surprise slowdown in Australian inflation.

While investors still expect the Reserve Bank of Australia (RBA) to hike by a quarter point to 3.10% next week, they have lowered the likely peak for rates to 3.60% from 3.85% a week ago and as much as 4.31% back in September.

Three-year yields matched their lowest since August at 3.065%, having fallen 20 basis points on the week. Stephen Halmarick, chief economist at CBA, is looking for the RBA to hike next week but then pause as it assesses the impact of all the tightening already delivered.

“Indeed, before the end of 2023 we expect to see the start of a monetary policy easing cycle in both the US and Australia, as central banks pivot towards a significant slowdown in economic growth,” he added.

The Reserve Bank of New Zealand has remained hawkish as a drum-tight labour market in New Zealand has seen wages spike and produce much more home-grown inflation.

It is projecting another 125 basis points of rate rises to a top of 5.5%, though markets have now shaved that a little to 5.36%.

The bond market is still priced for a recession next year, with 10-year yields trading 48 basis points under the two-year.