Hawkish Interest Rate Outlooks Have Buoyed the Australian and New Zealand Currencies

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Market expectations for the Australian and New Zealand dollars skyrocketed as local interest rates continued to climb, pushing bond yields to one-month highs. 

Both Australian and New Zealand currencies have gained valuable support from investors.

The Australian dollar rose from its early-week low of $0.6856 to its current standing of $0.6923. However, it still faces resistance at the mark of $0.7011 and is yet far away from its eight-month peak at $0.7158.

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The New Zealand currency has weakened slightly throughout this week to trade around $0.6317 – although that is up compared with its lowest rate in this period, which had been set at $0.6271.

Australia’s central bank highlighted its growing hawkishness with a warning that numerous rate hikes will most likely be essential to avoid an alarming wage-price spiral from manifesting. A strong resistance line lies around $0.6348.

The Reserve Bank of Australia (RBA) hiked rates to an unprecedented 3.35 per cent, the highest in a decade, indicating that internal pricing and wages pressures are intensifying across services. RBA needs to take further action to tell how far these prices will go.

This week, a drastic shift in market pricing occurred when the expected rate peak skyrocketed to 4.1 per cent from 3.60 per cent.

The RBA’s statement suggests it is thinking of at least two more rate hikes in coming months, likely March and April, with another in May if inflation remains high,” said Tapas Strickland, head of market economics at National Australia Bank (NAB).

With the RBA likely to consider more rate hikes until they detect an economic slowdown, Governor Philip Lowe will have his chance to give a firsthand perspective when he appears before Parliament on February 15 and 17.

As January jobs data is set to be released next week, markets are on high alert as yields on three-year paper have escalated by nearly 41 basis points this week, and 10-year yields have hit a one-month maximum of 3.74 per cent. 

With key wages figures due for release in late February, signs indicate that the bond market could unravel rapidly in the coming days.

Investors have recently priced in a higher chance that the Reserve Bank of New Zealand will increase their rates by 75 basis points at their meeting on February 22nd. 

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