Australian, New Zealand dollars regain their footing after Fed setback

THE Australian and New Zealand dollars were looking to regain some ground on Friday after suffering a setback as markets wagered on higher US interest rates for longer, ruining what had been a bullish week.

The Aussie bounced 0.5 per cent to US$0.6320, after retreating from US$0.6371 overnight. That still left it down 1.4 per cent for the week and well off its US$0.6493 top. Support lies around US$0.6272 and US$0.6212.

The kiwi dollar stood at US$0.5795, having eased 0.4 per cent for the week and away from its peak of US$0.5942. Support comes in at US$0.5745 and US$0.5662.

The Aussie took the harder knock as markets priced in a peak for US rates up around 5.0-5.25 per cent and well above what was expected at home.

That left Australian 10-year yields a chunky 29 basis points below those on Treasuries and levels not seen since before the pandemic.

The Reserve Bank of Australia (RBA) highlighted its relatively dovish stance in a quarterly policy statement on Friday, emphasising that it wanted to bring inflation down without tipping the economy into recession.

That is one reason the bank stuck to a smaller hike of 25 basis points this week, taking rates to 2.85 per cent. “Staying as close as possible to full employment whilst returning inflation to target is Plan A,” argued Gareth Aird, chief Australian economist at CBA, who expects only one more hike to 3.10 per cent.

“Holding rates steady for a while in early 2023 would afford some time to more fully assess the lagged impact of the already delivered hikes,” he added.

“We believe that provided there is a sufficient pause in the tightening cycle the Board will come to the conclusion that the economy does not require further rate rises.”

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Markets are far less sanguine and imply a peak for rates around 4.0 per cent in the middle of next year. In contrast, the Reserve Bank of New Zealand (RBNZ) continues to emphasise its goal is to curb inflation at all costs, even if that risks recession. Markets are wagering it will hike by a super-sized 75 basis points to 4.25 per cent later this month, and ultimately take rates to 5.25 per cent. “With the contrast in approach and rhetoric between the RBA and both the US FOMC and RBNZ, the AUD is trading on the back foot,” said Westpac chief economist Bill Evans. However, he reckoned the Federal Reserve would step down to a 50-basis point hike in December which would allow the Aussie to edge up to US$0.6500.