Key Takeaways
- Australian and New Zealand dollars declined against safe-haven currencies.
- Bonds benefited from a flight to safety amid global market rout.
- Reserve Bank of New Zealand expected to hike rates next week.
The Australian and New Zealand dollars faced downward pressure on Friday as global markets experienced a significant downturn, with risk assets being hit hard. This shift in sentiment saw the Australian dollar (A$) and the New Zealand dollar (NZ$) weaken against the Japanese yen and Swiss franc, while the US dollar also took a hit.
The rout in global share markets, particularly due to concerns over the enormous capital needs of artificial intelligence (AI), led to a rally in US Treasuries. This flight to safety saw yields on Australian 10-year bonds drop by 10 basis points to 5.164%, while 3-year futures rose by 9 ticks to 95.170.
Despite the broader market turmoil, the Australian dollar managed to hold steady at $0.7016, having risen 1% for the week. However, it saw a 0.9% drop against the yen and a 0.6% decline against the Swiss franc. The New Zealand dollar, meanwhile, fell 0.4% overnight, retreating from a one-month high of $0.5709 to $0.5683.
In the context of New Zealand, strong core inflation readings bolstered expectations that the Reserve Bank of New Zealand (RBNZ) would hike interest rates next week. Markets now imply a 95% chance of a quarter-point increase to 3.0%, with a peak of 3.75% expected next year. Analysts at Citi and Westpac both shifted their outlooks, with Citi calling for a hike next week and Westpac projecting rates to rise to 4.0% by September next year.
Citi economist Josh Williamson stated, 'We expect guidance to echo September, leaving the door open to further hikes. However, we see 3.00% as the peak given a fragile recovery, 5.6% unemployment, and slowing GDP, with binary upside risk from offshore tightening or unresolved Middle East tensions.'
Westpac chief NZ economist Kelly Eckhold added, 'Forward guidance will likely leave open the option to raise rates further at the December meeting without presenting it as a sure thing. We think a more measured tightening approach is appropriate from here as raising rates at every meeting until something “breaks” could be a risky strategy if downside growth concerns crystallise.'
The Australian dollar's performance was mixed, with resistance levels around $0.7040 and support at $0.6895. Analysts noted that the currency's performance was influenced by its status as a proxy for risk, though the main losses were seen against the safe-haven yen and Swiss franc.
Overall, the market reaction highlighted the ongoing volatility in global financial markets, with investors seeking safer assets amid concerns over the pace of US economic growth and the potential impact of AI on capital needs. The Reserve Bank of New Zealand's upcoming decision on interest rates will be closely watched, given the current economic conditions and inflationary pressures.
The Australian and New Zealand dollars' performance underscored the interconnectedness of global financial markets and the impact of broader economic and technological factors on currency values.
We expect guidance to echo September, leaving the door open to further hikes.
Josh Williamson, Citi economist
Forward guidance will likely leave open the option to raise rates further at the December meeting without presenting it as a sure thing.
Kelly Eckhold, Westpac chief NZ economist
