Australian and New Zealand Dollars Hold Steady Ahead of Federal Reserve Rate Decision, Local Bonds Suffer Amid Surging Oil Prices
The Australian and New Zealand dollars remained stable on Wednesday before the Federal Reserve’s rate decision, while local bonds faced challenges due to rising oil prices. Traders are concerned that interest rates may stay higher for a longer period of time, and the recent surge in oil prices to 10-month highs has further fueled these worries. As a result, Australian bonds experienced a sell-off, with yields on three-year government bonds reaching their highest level in about a month. At the same time, the kiwi dollar also traded flat against the U.S. dollar.
Looking at the specific exchange rates, the Australian dollar saw little change, trading at $0.6451. It had a slight increase of 0.3% overnight, reaching as high as $0.6474, but faced resistance at this near-term level. The 2023 low of $0.6358 serves as a support level. On the other hand, the New Zealand dollar remained unchanged at $0.5937, following a 0.3% rise overnight to $0.5946. This increase was aided by steady gains in dairy prices observed during an overnight auction.
The main focus for market participants is the Federal Reserve’s rate decision and the accompanying economic projections by chair Jerome Powell. The consensus expectation is that the rates will remain within the range of 5.25% to 5.5%. However, traders will closely watch for any signals or hints regarding future rate cuts by the central bank. Previously, expectations were leaning towards a 100-basis point reduction, but now traders are betting on a cut of around 70 basis points next year.
Analysts anticipate a potential pullback in the U.S. dollar’s recent rally. Tony Sycamore, an analyst at IG, stated that the U.S. dollar index rally may be approaching its peak and that a pullback could be expected soon. He added that events like the FOMC meeting and the Bank of Japan meeting on Friday might trigger such a pullback.
In response to the surging oil prices and concerns about higher interest rates, Australian bonds joined the global sell-off. The yield on three-year government bonds rose by 5 basis points to 3.951%, marking its highest level in approximately a month. Similarly, 10-year yields increased by 5 bps to reach a one-month high of 4.229%.
In summary, the Australian and New Zealand dollars remained steady ahead of the Federal Reserve rate decision, while local bonds faced challenges due to rising oil prices. Traders are closely watching for any indications of future rate cuts by the central bank.
