You are here
Australian dollar up on growth surprise, dive in US yields
[SYDNEY] The Australian dollar edged higher on Wednesday as surprisingly upbeat data provided a welcome dose of relief about the domestic economy, while an emergency rate cut in the United States weighed on its US counterpart.
The Aussie crept up 0.35 per cent to US$0.6606, having ventured as far as US$0.6646 overnight in immediate reaction to the Federal Reserve's shock rate move.
The rally took it away from a recent 11-year trough at US$0.6435, though it needs to break above chart resistance at US$0.6655/60 to keep the retracement going.
The New Zealand dollar added 0.1 per cent to US$0.6280, having touched an 11-year low of US$0.6180 early in the week.
The Aussie got added help when figures showed the economy expanded a faster-than-expected 0.5 per cent in the December quarter, lifting annual growth to 2.2 per cent.
Yet investors are all too aware that bushfires and the coronavirus are set to hammer activity this quarter.
"The hit to services exports and emerging disruption in supply chains, coupled with the earlier drag from the bushfires, will likely result in a contraction in Q1, and the risk of a recession has increased materially," said Sarah Hunter, chief economist for BIS Oxford Economics.
The Reserve Bank of Australia (RBA) had already responded by cutting its rates a quarter point to 0.5 per cent on Tuesday, and Ms Hunter expected a further move to 0.25 per cent in the near term.
Futures implied an 80 per cent chance of an easing at the next policy meeting in April, and even a 20 per cent probability of a move below there by year end.
The RBA has said 0.25 per cent would be the floor for rates and if further stimulus were to be needed it would adopt some form of quantitative easing, likely by buying government bonds.
That would give bonds yet another boost, with a surge in buying over the last couple of weeks driving 10-year yields to all-time lows at 0.672 per cent.
Three-year bond futures climbed another 7 ticks on Wednesday to reach 99.615, implying an yield of just 0.385 per cent. The 10-year contract added 7.5 ticks to 99.2850.
Yields on Treasuries have fallen even faster as the market priced in more Fed cuts, such that the spread between Australian and US 10-year yields has shrunk to just 24 basis points from 68 basis points a month ago.
Markets have also priced in a quarter-point rate cut from the Reserve Bank of New Zealand (RBNZ) at its next meeting on March 25, and a real chance of a half-point move.
"We expect a 50 basis point move from the RBNZ in March, by way of a coordinated catch up," said Jarrod Kerr, chief economist at Kiwibank. "The kiwi currency is also likely to hit US$0.6100, and we wouldn't rule out a move below US$0.6000."