Australia, NZ dollars play defence with bonds under siege

SYDNEY: The Australian and New Zealand dollars remained on the back foot on Tuesday as markets priced in an imminent US rate hike and more to come later, sending Aussie bond yields barrelling to fresh 15-year highs. Pressure on global bond markets was intense as Australian 10-year yields spiked 11 basis points (bps) to 5. 394%, bringing the increase for the year so far to 60 bps. Yields on New Zealand’s 10-year paper have climbed 24 bps in just two sessions to reach 5. 043%, peaks not seen since late 2023. Short-term swap rates have also surged, tightening financial conditions in the economy at a time when the Reserve Bank of New Zealand has been sounding dovish about the pace of further hikes in its cash rate. Data out on Tuesday showed electronic retail card spending fell a sharp 0. 9% in August, hit by higher petrol prices and borrowing costs. Figures due on Thursday are expected to show the economy grew a meagre 0. 2% in the second quarter. “There is a lack of momentum in household spending, with large increases in living costs and a soft labour market weighing on discretionary spending, ” said Satish Ranchhod, a senior economist at Westpac. “Spending growth is likely to pick up again next year as the jobs market eventually improves and inflation eases, but the recovery is likely to remain gradual. ” Yet investors are still pricing a 60% chance the RBNZ will hike its 2. 75% cash rate at the next meeting in October and reach 3. 75% by the middle of 2027. Markets imply an 85% probability that the RBA will hike to 4. 60% when it meets on September 29, but also fully expect the US Federal Reserve to tighten on Wednesday and to move again by December. The risk of a hawkish Fed kept the Aussie dollar pinned at $0. 7135 after easing 0. 4% overnight to as low as $0. 7109. The next layer of support lies at $0. 7067, while resistance is up at $0. 7150 and $0. 7187. The kiwi dollar idled at $0. 5778, having dived 0. 6% overnight to as deep as $0. 5757. Resistance lies at $0. 5835, with support at $0. 5762. RBA Governor Michele Bullock appears before Parliament on Friday and is likely to reiterate warnings that rates may have to rise further to restrain inflation.

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