Australian, NZ dollars on edge as markets weigh Fed scenarios

SYDNEY: The Australian and New Zealand dollars eased against a broadly firmer greenback on Wednesday as investors struggled to price the risks from a looming Federal Reserve meeting, where a range of outcomes could cause considerable volatility. Markets imply a 92% chance of a quarter-point rate rise and analysts assume the Fed will have to deliver to safeguard its anti-inflation credibility. More uncertain is what Fed members will plot for future hikes, and whether Chair Kevin Warsh provides any guidance on that. “Warsh has deliberately injected a significant distribution into the potential policy outcomes, and markets could experience a fairly wild hour or two as traders react to the statement, the new dot plot, the Fed’s economic projections and Warsh’s press conference, ” said Chris Weston, head of research at Pepperstone. Markets are priced for at least three Fed hikes by early next year, suggesting the greenback is vulnerable should Warsh sound anything less than hawkish. For now, the expectation of a cycle of hikes kept the Aussie pressured at $0. 7125, having eased 0. 1% overnight. Support lies at the recent three-week low of $0. 71085, with resistance at $0. 7149 and $0. 7187. The kiwi dollar sagged to a two-month trough of $0. 5740, after losing another 0. 3% overnight. It has now fallen for seven of the last eight sessions and breached support at $0. 5762, risking a retreat to $0. 5627. The Aussie also hit a fresh 13-year peak on the kiwi at NZ$1. 2392, having climbed 3. 3% in the past month. Markets imply an 85% chance the Reserve Bank of Australia will raise the 4. 35% cash rate by 25 basis points when it meets on September 29, and reach 4. 85% by early 2027. The hawkish outlook has combined with a rout in global debt markets to send 3-year bond futures diving to a 15-year low of 94. 875, while 10-year yields have shot up to 5. 381%. Investors see the Reserve Bank of New Zealand raising its 2. 75% cash rate to 3. 0% by December, and to 3. 75% by the middle of next year. The central bank itself has projected a much lower peak of 3. 1%, but the recent spike in oil prices has shifted risks to the high side. Analysts noted the RBNZ on Wednesday announced that Assistant Governor Karen Silk would leave the bank in December, and she was considered to be on the hawkish side of the policy board having seen upside risks to inflation.

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