SYDNEY: The Australian and New Zealand dollars rallied on Friday as hopes for a respite in the crisis wracking the UK gilt market boosted risk sentiment globally and squeezed speculators out of crowded short positions.
News that UK Chancellor Kwasi Kwarteng cut short a trip to Washington to fly back to London fanned speculation the government would U-turn on the recent mini-budget that did so much damage to bonds and sentiment in general.
Share markets across Asia extended an early bounce in reaction, and the safe-haven US dollar gave back just a little of its recent hefty gains.
Beijing also helped by promising stronger support for the ailing Chinese economy, the single biggest user of Australian commodities.
All of which lifted the Aussie 0.5% to $0.6332, and away from a fresh 2-1/2 low of $0.6170 struck during a wild session overnight.
It was still down 0.5% on the week, however, and vulnerable to a renewed slide as markets braced for ever higher US interest rates.
Likewise, the kiwi surfaced at $0.5668, having dived as deep as $0.5512 at one stage overnight.
That actually left it 1.4% higher for the week thanks in part to having a bigger rate cushion than its Antipodean cousin.
Australia, NZ dollars in holding pattern ahead of US CPI test
While the Reserve Bank of New Zealand (RBNZ) hiked rates by half a point to 3.5% this month, the Reserve Bank of Australia (RBA) surprised by only delivering a quarter-point rise to 2.6%.
The slowdown in hikes is also in stark contrast to the Federal Reserve.
Markets are now wagering it will raise rates by 75 basis points in both November and December following a red-hot reading on US core inflation.
Indeed, investors seemed to suspect the Fed’s likely aggression would pressure the RBA to follow and futures shifted to price in a peak for rates of 4.20% compared to 4.0% early this week.
“We have extended our estimate of the end of the RBA tightening cycle from February to March,” said Bill Evans, chief economist at Westpac.
“We now expect 25 basis point moves in November; December; February and March.”
“If our down swing in inflation in 2023 does not appear to be materialising - and that has to be a central risk - then we expect that the RBA will have to raise the terminal rate even further.”
The divergence in RBNZ rates has seen the Aussie slide 1.6% on the kiwi this week to NZ$1.1156, the biggest such drop since March 2020.