SYDNEY: The Australian dollar was holding its own against an otherwise firm greenback on Friday as a widening yield premium provided a buffer, while the New Zealand dollar was hamstrung by the fading chance of early rate hikes.
The Aussie was little changed on the day and the week at $0.7056, having found support at $0.7025 overnight.
The recent three-year top of $0.71465 remains the main target for bulls, while bears need to crack $0.6897.
The kiwi dollar was pinned at $0.5970, having shed 1.1% for the week so far to threaten support at $0.5929.
It also hit a near 13-year low on the Aussie at NZ$1.1833 after losing 0.9% on the week.
The currency was undone by a dovish outlook on interest rates from the Reserve Bank of New Zealand which badly wrongfooted investors wagering on tighter policy, following a blizzard of cuts over the past year or so.
“The Bank has made it clear that it does not intend to short-circuit the economic recovery that the sharp series of rate cuts were delivered to engineer,” said Prashant Newnaha, a rate strategist at TD Securities.
“We stick with the RBNZ on hold this year, and for 25bps hikes in Q1 and Q2 next year.”
Markets imply only a 40% chance of an increase in the 2.25% cash rate by September, from 68% early in the week, while October has shifted to 68% from 100%.
Two-year swap rates are down almost 15 basis points on the week at 2.9263%, while 10-year yields are off 8 basis points at 4.418%.
Australian bond yields have gone the other way as upbeat jobs data narrowed the odds on further rate hikes, leading three-year paper to pay a toothsome 83 basis points more than Treasuries.
Markets imply a 76% chance of the Reserve Bank of Australia hiking the 3.85% cash rate in May, and even March has nudged up to 28%.
“In our view, the market is severely underpricing the risk of a hike in March, which we now see as close to 50%,” said Faraz Syed, an economist at Citi.
“Our official forecast is for the RBA to hike again in May, and to change would likely need a strong January monthly CPI, and possibly a strong Q4 GDP.”
The monthly consumer price report is due on February 28 and gross domestic product on March 4, ahead of the RBA’s next meeting on March 17.
American Dollar Exchange Rate