Australian dollar slips, bonds enjoy biggest rally in a decade as RBA cuts priced in

THE Australian dollar eased on Tuesday (Mar 14) on souring risk appetite, while bonds posted their biggest rally in more than a decade as markets priced out any chance of further rate hikes from the nation’s central bank, the Reserve Bank of Australia (RBA), and even wagered on a cut in April.

The Antipodean slid 0.5 per cent to US$0.6636 as tanking share markets, gripped by contagion fears from the collapse of Silicon Valley Bank (SVB) and Signature Bank, shattered confidence.

It surged 1.3 per cent on Monday to as high as US$0.6717.

Three-year bond futures jumped a total of 43 ticks since Friday when SVB collapsed, reaching 97.008, in their biggest three-day rally since 2011.

Investors are now expecting the RBA will most likely pause its tightening cycle in April, leaving the cash rate unchanged at 3.6 per cent.

There was even a 7 per cent probability that the central bank would even cut interest rates by 25 basis points to 3.35 per cent.

Just a week ago, markets were wagering that rates might have to peak at 4.2 per cent.

That followed moves in the US markets, as traders drastically pared back expectations for the Fed funds rate to peak at 4.8 per cent now, compared with about 5.5 per cent previously, and had even priced in a whopping 70 basis point cut by the end of the year.

Fallout from the collapse of US lenders SVB and Signature Bank deepened overnight, despite government efforts to shore up investor confidence. Heavy selling of US regional bank stocks extended to Asia on concerns that banks worldwide could also be exposed to similar risks.

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“While the Fed’s move to backstop uninsured deposits will likely prevent further banking runs, a potential banking crisis threat trumps high inflation any day of the week,” said Tony Sycamore, analyst at IG Group.

“As noted in recent months and in wider financial circles, the Fed has historically continued tightening until something breaks,” Sycamore added.

New Zealand two-year swap rates plunged 33 basis points to imply an interest rate of 5.0 per cent on Tuesday, compared with 5.5 per cent just last week.

The kiwi also slid 0.2 per cent to US$0.6206, having jumped 1.4 per cent to as high as US$0.6263.

The currency faces resistance at US$0.6275.

US inflation data is likely to inject more volatility, even if investors see the Federal Reserve prioritising financial stability.

Ben Powell, Asia-Pacific chief investment strategist at BlackRock Investment Institute, expects the SVB collapse to complicate the Fed’s job in fighting inflation.

“We think that rates are not going to come down as quickly as the markets now imply ... We think the Fed would be highly reluctant to change their tune and the policy settings that they have been warning us for and have been delivering now for coming up to a year.” REUTERS