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Australia, New Zealand dollars back from the brink as rate cuts go global

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The Australian and New Zealand dollars were back from the brink on Friday as a rush toward central bank stimulus offshore rescued both currencies from multi-month lows and whetted risk appetites globally.

[SYDNEY] The Australian and New Zealand dollars were back from the brink on Friday as a rush toward central bank stimulus offshore rescued both currencies from multi-month lows and whetted risk appetites globally.

The Aussie firmed to US$0.6926, to be up 0.8 per cent for the week so far. The currency had broken down to US$0.6832 at one stage this week, the lowest since the flash crash of January.

Huge chart support lies at US$0.6827, the trough from early 2016, and a break there would take the currency back to the depths hit during the global financial crisis.

The kiwi also enjoyed a comeback to US$0.6590, a gain of 1.5 per cent for the week so far. That was a marked turnaround from early in the week when it hit a US$0.6490 low and bears threatened major support at US$0.6482.

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Both were saved by foreign factors as the Federal Reserve and European central Bank surprised by turning decidedly dovish, triggering a pullback in the dollar and euro and a massive rally in bonds worldwide.

All of which drowned out the doves at the Reserve Bank of Australia (RBA), where Governor Philip Lowe all but guaranteed another rate cut in the near-term.

Futures have lifted the probability of a July rate cut to 72 per cent, from less than 50 per cent at the start of the week, while a move in August is more than fully priced. A further easing to 0.75 per cent is implied by Christmas.

That led to a bumper week for bonds with yields on the three-year note down 7 basis points at an all-time trough of 0.92 per cent. The 10-year bond contract jumped 9 ticks for the week to an historic high of 98.7050.

The focus now switches to the Reserve Bank of New Zealand's (RBNZ) policy meeting on June 26 where it will be under pressure to ease if only to match the global trend in rates.

The market implies around a 31 per cent chance of a quarter-point cut in the 1.5 per cent cash rate next week, and 86 per cent for August. A further move to 1 per cent is priced in by early next year.

"The balance of risks has evolved in the direction of another cut, mainly due to global developments, but not so emphatically that the RBNZ needs to appear panicked by cutting the OCR again so soon," argued Westpac's chief New Zealand economist Dominick Stephens.

Still, he expected the central bank to reiterate its easing bias and highlight the risks to global growth.

"The RBNZ will probably express particular concern about official interest rate reductions in Australia and the increasing likelihood of reductions in the US, as this could impact the exchange rate," he added.

As a result, Westpac has changed its steady outlook and now expects rates will be cut to 1.25 per cent in August.

The bond market is already way ahead of the RBNZ with yields on two-year government paper at record lows of 1.125 per cent.

REUTERS