Australia, NZ 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 $0.6927, after dipping 0.5% to as far as $0.6872 overnight.

It has support at the 14-day moving average of $0.6898 and faces resistance at the five-month peak of $0.7064 touched on Wednesday.

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

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

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% in the second half of this year, compared with 4% 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.

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“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.”

Attention is now squarely on the quarterly inflation report next Wednesday.

Economists expect consumer prices rose 7.5% in the fourth quarter last year from a year ago, picking up from 7.3% the quarter before.

However, that is still below the RBA’s forecast of a peak of around 8% for the quarter.

The yield on three-year bonds fell by 19 bps this week to 2.999%, below the official cash rate of 3.1%.

The 10-year bond yield tumbled 65 bps this year – the most since 2012 – to 3.394%.

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