Australia, NZ dollars suffer rough week, RBA rate outlook little help

SYDNEY: The Australian and New Zealand dollars were heading for a fifth session of losses on Friday as a spike in Treasury yields pressured bond markets at home and risk sentiment globally.

A hawkish-sounding policy outlook from the Reserve Bank of Australia (RBA) offered the Aussie little support as investors are still pricing in scant chance of an actual hike in rates until February at the earliest.

That left the Aussie languishing at $0.6363, having shed 2.4% on the week so far.

The fall reversed almost all the gains made the previous week when it was the US dollar under pressure, and threatened support around $0.6350. The kiwi dollar was down 1.8% for the week at $0.5893 , leaving it uncomfortably close to support at $0.5860.

Their US counterpart got a lift from a rate warning by the head of the Federal Reserve, along with a poor 30-year US bond auction which sent Treasury yields sharply higher.

The RBA was also cautioning about upside risks to inflation as it revised up forecasts for both consumer prices and economic growth over the next two years. Yet futures still imply only around an 8% chance of another rate hike in December, following this week’s increase to a 12-year top of 4.35%.

The probability then rises to nearly 50% for the following policy meeting in February.

Australia, NZ dollars lower

“There’s a possibility of a hike in February after the Q4 inflation print, especially given that the RBA’s forecasts show inflation remaining very close to 4% even until mid-2024,” said Rahul Bajoria, an economist at Barclays.

“The relatively better forecasts on growth and unemployment suggest that cash rates will also be kept higher for longer.”

Barclays sees no easing in policy until the fourth quarter of next year, while the market has almost no cuts at all priced in for 2024.

“In the near term the balance of risks sits with a higher terminal cash rate than 4.35%,” said Gareth Aird, head of Australian economics at CBA.

“Another upside surprise in the Q4 CPI could see the RBA pull the rate hike trigger again.”

The RBA itself is looking for both consumer prices and core inflation to rise around 1.0% this quarter.

Further out, Aird expects inflation so fall quickly enough to allow the RBA to cut rates by 75 basis points in late 2024, and for further easing to 2.85% by mid-2025.