Australia and New Zealand dollars suffer collateral damage in stock implosion – Markets

SYDNEY (Reuters) – The Australian and New Zealand dollars were licking their wounds on Friday after a massive sell-off in global equity markets weighed on risk assets and commodities, breaking several support levels in the process.

The Aussie was back at $0.7100, after falling 1.3% overnight to break support at $0.7140. Repeated failure to clear the 200-day moving average at $0.7253 has rendered the outlook bearish for a test of $0.7055.

The Kiwi Dollar fell to $0.6382, after losing 1% overnight and breaking support at $0.6423 and $0.6390.

The next stops are $0.6353 and $0.6292. The two currencies heavily linked to commodities have shown a close correlation with equity markets in recent months, while the US dollar tends to benefit as the most liquid safe haven.

Even an outsized half-point rate hike by the Reserve Bank of Australia (RBA) this week didn’t help much. The market is almost entirely pricing in another 50 basis point rise to 1.35% in July and rates of 3% by the end of the year.

While most analysts doubt the RBA is so hawkish, the bank seems keen to get rates back to neutral faster than previously thought.

The Aussie dollar looks to extend its yield advantage over the yen

“We see the RBA taking the cash rate to 2.35% by November – the lower half of what it currently considers the neutral range – six months ahead of schedule,” said David Plank, head of the Australian economy at ANZ.

He forecast another quarter-point hike in February, then pause to see if the economy reacts to rising borrowing costs as households carry record mortgage debt of A$2 trillion.

“Ultimately we see the RBA taking the cash rate to a restrictive level above 3% in late 2023 or early 2024,” he added. “A sustained period of below-trend growth will likely be needed to bring inflation back to the target level.”

The market has rates reaching almost 4% at the start of 2024, which will then be followed by reductions presumably as the economy slows down. Similarly, three-year bond yields climbed to their highest since early 2012 at 3.27%.

The surge narrowed the gap with 10-year yields to a slim 37 basis points, the smallest since just before the pandemic hit.

This flattening of the yield curve suggests that the market thinks the RBA is ready to tighten decisively and thus rein in inflation, even if it risks an economic slowdown.