The Australian and New Zealand dollars enjoyed a rare rally on Wednesday as commodity prices showed some resilience, though bonds still nursed losses that saw New Zealand yields spike to 12-year highs this week.
The Aussie crept up 0.4% to $0.6447 AUD=D3 , but was again meeting resistance in the $0.6450/60 zone. The kiwi dollar firmed to $0.5960 NZD=D3 , but needs to clear $0.5996 or risk a return to the recent nine-month low of $0.5897.
The Aussie was aided by a rebound in iron ore, Australia's single biggest export earner, which hit two-year highs on the Dalian exchange having climbed for nine straight sessions.
Yet both currencies would be vulnerable should Federal Reserve Chair Jerome Powell sound in any way hawkish at the Jackson Hole conference on Friday, which would also be a blow to stressed bond markets.
New Zealand's debt has been particularly hard hit in recent weeks, with 10-year yields NZ10YT=RR touching a top of 5.185% having climbed 63 basis points since mid-July.
That compares to increases of around 40 basis points for Australian and U.S. debt.
The scale of the sell off partly reflects a relatively hawkish outlook from the Reserve Bank of New Zealand (RBNZ) which has seen markets price in more risk of a further hike in the 5.5% cash rate, and abandon any hope of a rate cut for all of 2024.
0#RBNZWATCH The country also has to fund a widening current account deficit, with exports to China alone down 24% in July from a year earlier mainly due to weakness in dairy.
Domestic demand is also struggling with data out Wednesday showing retail sales slid a real 1.0% in the June quarter, when analysts had looked for a dip of around 0.4%.
"Financial pressures are continuing to eat away at households' purchasing power, with the value of total spending also declining despite very strong population growth and a recovering tourism sector," said Darren Gibbs, a senior economist at Westpac.
"Unfortunately for households, as the Reserve Bank made clear, interest rates are likely to remain at or above current levels for some time yet."
The Reserve Bank of Australia (RBA) has taken a more dovish turn, hinting that rates were already high enough to bring inflation to heel over time.
Australia is also running a large current account surplus with exports to China holding up well thanks to resilient demand for iron ore and coal.
