SYDNEY: The Australian and New Zealand dollars were trying to find their footing on Tuesday after a squeeze on short positions lifted them from deep lows, while bonds were whipsawed by a vicious reversal in US Treasuries.
Some wild moves in markets left the Aussie up 0.4% at $0.6015 and away from a five-year trough of $0.5933 hit on Monday.
The bounce was still minor compared to last week’s losses of almost 4%.
The kiwi dollar clambered up to $0.5562, having also touched a five-year low on Monday at $0.5504.
Bonds were wrong-footed by a turnaround in Treasuries, which saw Australian three-year futures dive to 96.620 from a top of 96.750 on Monday.
Markets remain vulnerable to concerns US President Donald Trump’s tariff policies will cause economic pain globally, and particularly for China - Australia’s single biggest export market.
Trump on Monday threatened to slap a further 50% levy on imports from China if Beijing did not abandon its own tariffs.
China’s commerce ministry on Tuesday replied it would never accept Trump’s “blackmail”, setting the stage for an escalation in the trade war.
The turmoil in markets was already having an impact on Australian consumers with a Westpac survey showing a sharp fall in sentiment late last week.
Investors are wagering all this uncertainty will tip the Reserve Bank of Australia into cutting rates when it next meets in May, even though policy makers have sounded cautious about easing.
Australia dollar dives to five-year low as markets bet on big rate cuts
Markets are fully priced for a cut of 25 basis points in the 4.1% cash rate, and imply some chance of a half-point move. Rates are seen at 3% by year-end.
The Reserve Bank of New Zealand holds its next policy meeting on Wednesday and is considered certain to cut the 3.75% official cash rate (OCR) by 25 basis points, with again some chance of a drop to 3.25%.
“Markets have moved to price in risks of a much lower OCR over 2025 as the bomb that the US administration detonated on global trade reverberates,” said Kelly Eckhold, chief NZ economist at Westpac.
“There are risks of a larger cut, but uncertainties should see the RBNZ keep that powder dry,” she added.
“We expect commentary indicating a firm intention to get the OCR to 3% soon.” Markets see rates at 3.0% by July, and 2.75% by the end of the year.
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