Australian, New Zealand dollars recover ground on a wobbly dollar; bonds rally

THE Australian and New Zealand dollars recovered some ground on Friday after fears of a US recession led markets to price in rate cuts by the Federal Reserve later this year, while local bonds enjoyed a sizeable rally after soft jobs data.

The Aussie bounced back to US$0.6927, after dipping 0.5 per cent to as far as US$0.6872 overnight. It has support at the 14-day moving average of US$0.6898 and faces resistance at the five-month peak of US$0.7064 touched on Wednesday.

It was, however, headed for a weekly drop of 0.7 per cent.

The kiwi was up 0.3 per cent at US$0.6415, after sliding 0.7 per cent to as low as US$0.6369 overnight. It was set for a weekly gain of 0.5 per cent.

A flurry of US data on Thursday indicated the world’s biggest economy was slowing down after multiple hefty interest rate hikes from the Federal Reserve, with traders hoping for a pause in tightening this year.

The Aussie had been weighed by local data on Thursday showing that Australia’s employment unexpectedly fell in December, spurring a bond rally as markets priced in a lower peak for interest rates from the Reserve Bank of Australia.

Futures market now expect rates to peak about 3.5 per cent in the second half of this year, compared with 4 per cent just at the end of last year. They’re also more split on whether the RBA will push ahead with another 25 basis point (bps) hike or pause.

“I think it does sort of point to the way which the bond market participants are clutching at any chance to buy bonds at the moment. I think that reflects positioning as well as a broader change in sentiment,” said Kenneth Crompton, senior interest rate strategist at NAB.

“Maybe it’s just the Aussie employment release is sort of the excuse for big moves rather than necessarily something inherently intrinsic to that data, I think.”

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Dollar slips after weak data; yen ticks up

Attention is now squarely on the quarterly inflation report next Wednesday. Economists expect consumer prices rose 7.5 per cent in the fourth quarter last year from a year ago, picking up from 7.3 per cent the quarter before.

However, that is still below the RBA’s forecast of a peak of around 8 per cent for the quarter. The yield on three-year bonds fell by 19 bps this week to 2.999 per cent, below the official cash rate of 3.1 per cent. The 10-year bond yield tumbled 65 bps this year – the most since 2012 – to 3.394 per cent. REUTERS