News: Australia, NZ dollars roiled by resource rout, rate peaks reconsidered

The Australian and New Zealand dollars were on the defensive on Wednesday after fears of global recession slugged commodity prices, while also lowering bond yields as investors pared back wagers on sharply higher interest rates.

The Aussie was huddled at $0.6810 AUD=D3 , having slid 1.0% overnight to a two-year trough of $0.6762. The pullback threatened chart support at $0.6750, with resistance now at Tuesday's top of $0.6895.

The kiwi dollar stood at $0.6177 NZD=D3 , having also hit a two-year low of $0.6125. There is not a lot of chart support until $0.5930, while resistance lies at $0.6226.

The Aussie still managed to gain on the euro as soft European data saw markets scale back expectations for rate hikes there, slapping the euro down 0.8% to A$1.5105 EURAUD= .

Investors also had second thoughts about how far the Reserve Bank of Australia (RBA) might ultimately raise rates, after it hiked by 50 basis points on Tuesday to 1.35%.

Futures 0#YIB: still lean toward another 50 basis points in August and further moves to 3.1% by year end, but the peak for rates is now seen around 3.5% compared to more than 4% a month ago. RBAWATCH

Most economists doubt the RBA will be even that aggressive given policy makers expect inflation to ease next year and highlighted concerns about how households would cope with higher borrowing costs.

"We expect a further 50bp hike in August; then a pause, before more hikes in Q4 and Q1 2023, lifting the cash rate to 2.6%," said Paul Bloxham, head of Australian economics at HSBC.

"Assuming the inflation spike does not embed itself in longer term expectations, 250 bps of hikes will be effective in slowing growth, particularly as it drives a hefty decline in housing prices."

Futures for three-year bonds YTTc1 rose 5 ticks to 96.895, while yields on 10-year bonds AU10YT=RR stood at 3.447%, far below their June peak of 4.125%.

The kiwi had its own problems as prices for New Zealand's largest export earner, dairy, fell 4.1% at the latest auction.

"Global growth concerns alongside the risk of further lockdowns in China are weighing on dairy prices," said Kristina Clifton, a senior currency strategist at CBA.

"The path of least resistance for NZD/USD is down and we expect NZD to test $0.6000 before the end of the month."