Aussie, Kiwi Dollars Slide as US Rate Hike Looms; Bond Yields Surge
Australian and New Zealand dollars weakened as markets priced in an imminent US rate hike, sending Aussie bond yields to 15-year highs.
The Australian and New Zealand dollars remained on the defensive on Tuesday, weighed down by expectations of an imminent US interest rate increase and the prospect of further tightening later in the year. The pressure drove Australian bond yields to fresh 15-year peaks, with the 10-year yield jumping 11 basis points to 5.394%, taking its rise so far this year to 60 basis points.
New Zealand's 10-year yields have climbed 24 basis points in just two sessions to 5.043%, a level last seen in late 2023. Short-term swap rates have also risen sharply, tightening financial conditions even as the Reserve Bank of New Zealand has signalled a more cautious stance on the pace of further increases in its cash rate.
Data released on Tuesday showed electronic retail card spending fell 0.9% in August, pressured by higher petrol prices and borrowing costs. Figures due on Thursday are expected to show the economy grew by just 0.2% in the second quarter.
"There is a lack of momentum in household spending, with large increases in living costs and a soft labour market weighing on discretionary spending," said Satish Ranchhod, a senior economist at Westpac. He added that spending growth is likely to pick up next year as the jobs market improves and inflation eases, but the recovery is expected to remain gradual.
Despite the weak data, investors are pricing a 60% chance that the RBNZ will raise its 2.75% cash rate at its next meeting in October, and see it reaching 3.75% by mid-2027. Markets also imply an 85% probability that the Reserve Bank of Australia will hike to 4.60% at its September 29 meeting, while fully expecting the US Federal Reserve to tighten on Wednesday and again by December.
The risk of a hawkish Fed kept the Australian dollar pinned at $0.7135 after easing 0.4% overnight to as low as $0.7109. Support is seen at $0.7067, with resistance at $0.7150 and $0.7187. The New Zealand dollar idled at $0.5778, having dived 0.6% overnight to $0.5757. Resistance lies at $0.5835, with support at $0.5762.
RBA Governor Michele Bullock is due to appear before Parliament on Friday and is likely to reiterate warnings that rates may need to rise further to restrain inflation.