Australia, NZ dollars recoil as markets wager on aggressive Fed

SYDNEY, Feb 7 (Reuters) – The Australian and New Zealand dollars were on the defensive on Monday after a staggeringly strong U.S. payrolls report added to the risk of faster rate hikes there and sent bond markets reeling.

The Aussie was back at $0.7076 , having shed 0.9% on Friday after the jobs report sent Treasury yields flying. Support lies around $0.7050 with resistance now up at $0.7168.

The kiwi dollar stood at $0.6615 , after falling 0.7% on Friday. That left it well short of last week’s top of $0.6683 while support comes in at $0.6590.

Markets are now pricing in a one-in-three risk the Federal Reserve could hike by a full 50 basis points in March and have rates approaching 1.5% by year end.

That in turn fuelled speculation the Reserve Bank of Australia (RBA) would have to follow the tightening trend, even though policy makers insist they can afford to wait until late in the year.

Futures imply the RBA will lift rates to 0.25% as early as June, with a chance of reaching 1.25% by Christmas.

Australian three-year yields jumped 8 basis points to 1.32%, heights not visited since mid-2019. Yields on 10-year bonds hit 2.01% and looked set to test the recent top of 2.05%.

Adding to the risk of rate rises was data showing Australian retail sales surged a real 8.2% in the December quarter, easily the largest gain on record and a big boost to economic growth.

“AUD can dip below $0.7000 again while the RBA maintains its relatively dovish stance, and especially if markets increase pricing for a 50 bps increase in the Fed Funds rate in March,” said Joseph Capurso, head of international economics at CBA.

“The Australia minus U.S. 10-year bond differential has slumped close to zero again,” he added. “A dip in the differential below zero can weigh strongly on the AUD.”

Editing by Sam Holmes

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