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Australia, NZ dollars retreat from US rate hike risk

[SYDNEY] The Australian dollar wallowed near six-week lows on Wednesday as the ever-mounting risk of a December rate rise from the Federal Reserve gave a lift to its US counterpart.

The Aussie dollar had settled at US$0.7867, having sunk 0.6 per cent overnight from US$0.7936. That left it uncomfortably close to chart support at the August low of US0.7808 and a break there would deal a major bearish blow.

The New Zealand dollar was likewise soft at US$0.7207, having fallen 0.8 per cent on Tuesday. The political uncertainty has weighed on the New Zealand dollar in the wake of an inconclusive election result last Saturday.

The retreat came after Fed Chair Janet Yellen warned against moving too gradually on tightening, saying it would be imprudent to wait until inflation got to its 2 per cent target.

"Yellen is clearly in-line with the median dot forecast of a hike in December and three more next year," said Tom Porcelli, chief US economist at RBC Capital Markets. "In other words, she is trying to point us in the direction of more hikes, the Fed's forecast, and not less hikes, the market's forecast."

As a result, futures markets lifted the probability of a December move to around 78 per cent, up from less than 50 per cent a couple of weeks ago.

In contrast, the Reserve Bank of Australia (RBA) has made it clear a rate rise is not in prospect for some time to come. Interbank futures imply virtually no chance of a hike in this year and a move is not fully priced in until August.

"The market is being forced to reassess the prospects of a Fed hike," said Ray Attrill, global head of FX strategy at NAB, which was a clear positive for the US currency. "The strength we've seen in the Aussie this year is an exclusive product of US dollar weakness," he added. "I think the Aussie rally may have ended now."

The Aussie touched its highest in over two years earlier in September and was still up more than 9 per cent for the year so far.

Neither are there any expectations for a rate rise in New Zealand.

The Reserve Bank of New Zealand (RBNZ) releases its latest policy statement on Thursday and is considered certain to hold at 1.75 per cent while reiterating that policy will stay loose for a considerable period.

New Zealand government bonds were mixed on Wednesday with yields creeping up at the long end.

Three-year Australian government bond futures were flat at 97.830, while the 10-year contract eased 2 ticks to 97.1800.


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