AUD/USD and NZD/USD Fundamental Daily Forecast – Aussie Bond Market Volatility Forces RBA to Step In
James HyerczykSun, October 24, 2021, 6:19 AM
The Australian and New Zealand Dollars closed mixed on Friday while hovering just under multi-month highs reached earlier in the week. The Aussie remained just below its weekly high at .7547, its best level since July 6. The Kiwi was just below its high of the week at .7219, which was its highest level since June 8.
Jump in Demand for Risk Supporting Aussie, Kiwi Rise
A weaker U.S. Dollar also helped underpin the Australian and New Zealand Dollars. The greenback edged lower on Friday as news that heavily indebted property firm China Evergrande Group had averted a default buoyed appetite for risky assets.
With global investors discounting the prospect of Federal Reserve tapering in November and the prospects of a first U.S. rate hike by next July throughout the week, the U.S. Dollar has become more sensitive to risk sentiment. Aussie and Kiwi investors, meanwhile, embraced the jump in demand for risky currencies.
“The winners tell us that risk sentiment is thriving, despite 10-year note yields closing in on April’s highs. If higher yields don’t damage sentiment, then yields will go on rising,” said Kit Juckes, a currency strategist at Societe Generale.
RBA Makes Moves to Defend Its Yield
The boost to the Aussie from Evergrande’s news was outweighed by action from the Reserve Bank of Australia to stem a bond sell-off, as well as the pause in energy price rises.
The RBA said on Friday it had stepped in to defend its yield target for the first time in eight months, spending A$1 billion ($750 million) to dampen an aggressive bonds sell-off as traders have bet on inflation pulling forward rate hikes.
The Reserve Bank had to make the move because yields were rising too fast and without merit if you believe the central bank will not make its first interest rate hike until 2024. Speculators were betting the RBA would make a move before that.
Strength in Consumer Prices in Q3 Should Nudge RBNZ to Hike Rates More Aggressively
New Zealand’s Consumer Price Index (CPI) rose 2.2% in the third quarter, beating expectations. The news contributed to a spike in the New Zealand Dollar earlier in the week as traders bet more monetary policy tightening by the central bank in response to the higher than expected inflation.
The Reserve Bank (RBNZ) hiked rates earlier this month, and signaled further tightening to come, as it looks to keep inflation near its target 1-3% range, and to cool a red-hot housing market.
For a look at all of today’s economic events, check out our economic calendar.