Australia, NZ dollars hold weekly gains as bulls scent rate hikes

SYDNEY: The Australian and New Zealand dollars were holding gains for the week on Friday as markets moved to price in a real chance of rate hikes next year, sending bond yield spreads shifting sharply in their favour.

The Aussie was flat at $0.6609, having got to a two-month top of $0.6624 overnight.

That left its gains for the week at 0.9%, while a break of resistance around $0.6628 would open the way to the September peak of $0.6706.

The kiwi dollar idled at $0.5760, having added 0.4% for the week.

The currency again stalled at $0.5780, short of major resistance around $0.5801.

The Reserve Bank of Australia holds its last meeting of the year next week and a run of hot data on inflation, economic growth and household spending has wiped out any chance of a cut in the 3.60% cash rate.

Just a couple of weeks ago futures were still pricing at least one more rate cut early next year, but now they fully imply the next move will be up and possibly as soon as May.

All eyes will thus be on the RBA statement and media conference to see how alarmed policymakers are at this unexpected turn of events.

“At a minimum, we think RBA commentary is likely to take a more hawkish tone, reflecting a shift in the distribution of risks to the monetary policy outlook,” said Sally Auld, group chief economist at NAB. “Core inflation accelerated in 3Q and looks like it will be strong in 4Q,” she added.

“The economy is already at trend growth, and private final demand is running stronger than the RBA anticipated.”

Yields on 10-year bonds are up an eye-watering 16 basis points for the week at 4.697%, and threatening a bearish breach of a double-top at 4.713%/4.721%.

The spread over Treasuries has blown out to 59 basis points, from just 17 basis points a month before, the biggest premium since August 2022.

“The strength in key indicators since mid-year has surprised us,” wrote Andrew Canobi, director at Franklin Templeton Fixed Income in a note.

“We didn’t think the RBA would be facing the prospect of hikes in 2026, yet that now looks increasingly plausible.”

“From here we just don’t see the case for a strong rally in Australian rates. We’re looking elsewhere for value.”