James Hyerczyk
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The Australian and New Zealand Dollar plunged on Friday after U.S. Treasury yields jumped, as prospects of higher inflation and economic growth increased, making investors doubt that central banks would retain ultra-low interest rates for a longer period.

Overnight, the benchmark 10-year yield touched its highest in a year at 1.614%, causing a sell-off in U.S. equities and other global stock indexes.

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The price action suggests bond market investors don’t believe that the Fed or other central banks could continue to keep rates at such low levels in the face of a recovering economy and rising commodity costs. Furthermore, the Aussie and the Kiwi could face additional pressure along with the global equity markets if bond yields continue to rise as investors will be encouraged to rebalance their portfolios.

On Friday, the AUD/USD settled at .7704, down 0.0168 or -2.14% and the NZD/USD finished at .7233, down 0.0153 or -2.07%.

Reserve Bank of Australia Forced to Intervene

The Australian Dollar was whacked on Friday, pushed lower from a multi-year peak at .8007, hit on Thursday, as a rout in bond markets spread to other risk assets, spurring the country’s central bank to intervene to stem a savage selloff in government debt.

The Aussie had been flying high throughout the week as it jumped the .8000 barrier for the first time since February 2018, but reality came back with a vengeance when investors started to dump higher risk commodities and equities.

At one point on Friday, Australian 10-year bond futures were down as much as 23 ticks at an 11-month low of 98.0450, before bouncing to 98.2600. That still left them nursing losses of 30 ticks for the week, the sharpest drop since mid-2015, according to Reuters.

Cash yields spiked as far as 1.970%, levels unseen since April 2019, before easing to 1.74%. Again, they were still up a steep 32 basis points on the week.

The selling pressure became so intense the Reserve Bank of Australia (RBA) launched an unscheduled offer to buy A$3 billion ($2.36 billion) in three-year debt. That seemed to calm markets a little and three-year yields eased back to 0.127% from 0.157%.

Three-year futures pared their early losses but were still down 8 ticks for the week at an implied yield of 0.315%.

Markets were also wagering the RBA might have to hike rates as early as next year, even when policy makers have said no move was likely until 2024 at the earliest.


Short-Term Outlook

“Thoughts turning to rate hikes are understandable given the greater confidence about the economic outlook,” said Peter Munckton, chief economist at Bank of Queensland. “But pricing looks increasingly at odds with stated global central bank policies, which have made it clear that rates will rise later in this economic cycle than they have done over the past twenty-plus years.”

The RBA may be pleased with the steep drop in the Australian Dollar, but it’s probably not happy with the volatility in the domestic bond market. Look for RBA policymakers to address the issue that it will move to tighten monetary policy sooner than expected. It has to find a way to regain control of its policy intentions.

For a look at all of today’s economic events, check out our economic calendar.

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