The Australian and New Zealand dollars scaled fresh five-month highs on Wednesday as expectations for aggressive U.S. rate cuts boosted risk appetite and commodities, while keeping bonds well bid.
The Aussie firmed to $0.6829 AUD=D3 , clearing resistance at $0.6820 and edging ever closer to a double-top from June and July at $0.6895/6900.
The kiwi dollar reached $0.6334 NZD=D3 , and again is aiming for its July peak of $0.6412. Just a couple of months ago the kiwi had delved as deep as $0.5774, but was saved by a sea change in U.S. rate expectations.
The latest benign U.S. inflation report saw futures imply an 80% chance the Federal Reserve will cut rates as soon as March, with a total of 152 basis points of easing priced in for all of 2024. FEDWATCH
Goldman Sachs now expects three consecutive quarter-point cuts in March, May, and June, followed by one cut per quarter until the funds rate reaches 3.25-3.5%.
That dovish outlook has led investors to price out any risk of another rate hike from the Reserve Bank of Australia (RBA), even though the central bank still has a tightening bias.
A first quarter-point rate cut is implied as early as June, though only a relatively modest 50 basis points of easing over all of 2024.
0#RBAWATCH The Aussie was also underpinned by a surge in iron ore prices to an 18-month high at $140 a tonne, The mineral is Australia's single biggest export earner, and the jump bodes well for the trade account, mining profits and tax revenues.
The Australian government has already cut its borrowing plans for this year as it is likely to run a budget surplus thanks to strong revenues and low unemployment.
Washington issues more debt in one week than Australia does in an entire year, giving local bonds a supply advantage over Treasuries.
That is one reason Australia is no longer a "high-yielder", paying the same or less than the United States to borrow. Yields on 10-year bonds AU10YT=RR are near four-month lows of 4.05%, having fallen from a peak of 4.999% in November.
Markets are wagering the Reserve Bank of New Zealand will start cutting in May, even though it came close to hiking in December and warned policy would stay steady into 2025.
Two-year swap rates NZDSM3NB2Y= have fallen all the way to 4.72%, from a top of 5.83% in October, putting them well under the 5.5% cash rate.
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