Australian, New Zealand dollars pause near multi-month peaks as bond selloff deepens

The Australian and New Zealand dollars lingered near multi-month highs on Tuesday (Sep 1) as global bond selling intensified, leaving investors wary. Australian 10-year bond yields jumped 9 basis points to a five-month peak of 5.166 per cent, while 3-year futures fell 7 ticks to 95.280. The decline in Treasury bonds was driven by concerns over US budget deficits and debt levels, with local markets also pressured by expectations that interest rates may stay higher for longer to curb inflation.

The Reserve Bank of Australia (RBA) now sees a 54 per cent chance of raising rates by a quarter point to 4.6 per cent at its Sep 29 meeting, up from just 10 per cent a week earlier. Some even price a 40 per cent probability of a further move to 4.85 per cent. Despite weak economic data showing a slowdown in the second quarter, core inflation remains stubbornly high at 3.6 per cent, pushing the RBA toward its fourth rate hike this year.

HSBC's Paul Bloxham warned that the RBA faces difficult decisions, with weak GDP growth potentially leading to stagflation or a stronger growth print forcing another rate hike and risking recession. The Aussie currency traded at US$0.7170, finding support around US$0.7150 and facing resistance at the recent 15-week high of US$0.7208 and the May peak of US$0.7277.

The New Zealand dollar was flat at US$0.5916, with support at US$0.5900 and resistance at the three-month top of US$0.5988. While the RBA is expected to raise its official cash rate by 25 basis points to 2.75 per cent on Wednesday, there is less certainty about future hikes, with markets pricing in a 3.07 per cent rate for December and 3.65 per cent by late 2027.