The Australian and New Zealand dollars were on the defensive on Wednesday in case a policy meeting of the Federal Reserve produces even a whisper of stimulus reduction, which could also threaten the recent rally in bonds.
The Aussie steadied at $0.7693 AUD=D3 , having slipped as far as $0.7675 overnight. Major support is not far away at the June low of $0.7646 and a breach would risk a retreat to $0.7580.
The kiwi was looking vulnerable at $0.7136 NZD=D3 , after briefly breaking support at $0.7116 overnight. It risks a return to $0.7070 or even $0.7000.
Much depends on whether Fed members lift forecasts for rates and inflation, and whether Chair Jerome Powell stays dovish in his post-meeting news conference.
"From a market perspective, the key will be whether the FOMC began 'talking about talking' about tapering its asset purchases," said Damien McColough, Westpac's head of rates strategy. "We think that is a strong likelihood."
"However, we think Fed Chair Powell will strongly emphasise that this is just the beginning of an extended discussion," he added. "Indeed, we suspect that he will reiterate that the recent jump in inflation is 'transitory'."
Market thinking on domestic policy could also change when Reserve Bank of Australia (RBA) Governor Philip Lowe gives a speech on the economy on Thursday.
Minutes of its June meeting showed it would consider a number of possible revisions to its bond buying campaign at its July policy meeting.
"Given the sharp V-shaped recovery that is now evident, we think it appropriate to pull back a little on unusually aggressive policy accommodation, and we think the governor should set out a carefully crafted case for doing so," argued Nomura economist Andrew Ticehurst.
He expects the RBA will not extend its yield target to November 2024, but will set another round of bond buying albeit at a slower pace than the present A$5 billion s week.
Expectations that the yield target will remain tied to the April 2024 bond led to a sharp shift in three-year bond futures when the June contract expired on Tuesday.
The September contract is trading at 99.660 YTTc1 , implying a yield of 0.34%, while the June contract had ended at 99.846 for a yield of 0.154%.
The move in 10-year bond futures YTCc1 was more modest, with the September contract at 98.4500 compared to the June close at 98.5510. Cash 10-year yields AU10YT=RR held at 1.49% having rallied to a four-month low of 1.418% last week.
