The Australian and New Zealand dollars are experiencing a surge in value as the market believes that U.S. interest rates have peaked. This comes as both currencies are on track to have their strongest week in four months.
The Australian dollar is currently holding at $0.6434, having risen 0.6% overnight to reach a five-week high of $0.6456. This week, it is expected to have gained 1.5%, significantly distancing itself from last month’s one-year low of $0.6271. However, it is facing heavy resistance at $0.6445.
Similarly, the New Zealand dollar is performing well, currently sitting at $0.5894. Overnight, it saw a 0.8% increase to reach $0.5916, marking its highest point in over two weeks. Like its Australian counterpart, it is also heading for a 1.5% weekly increase, though it is facing resistance at $0.5916.
This positive outlook for the Australian and New Zealand dollars comes as the market believes that the global rate-hiking cycle is coming to an end. The recent decision by the Bank of England to maintain its policy interest rate has solidified the notion that the three major central banks in the world are now in a higher-for-longer holding pattern.
The U.S. Federal Reserve recently announced that it will keep rates steady, and Chair Jerome Powell struck a cautious tone by stating that the risks to the rate settings outlook were balanced.
In Australia, the central bank is widely expected to raise rates by a quarter point next week and maintain a tightening bias. According to a Reuters poll, nearly 90% of economists predict that rates will reach 4.35% at the policy meeting on November 7. The market currently implies a 58% chance of a rate hike next week.
Despite the positive news, data shows that Australian retail sales volumes experienced a slight increase in the September quarter. However, sales per person still saw the largest annual drop on record as consumers became more frugal due to cost of living pressures and high borrowing costs.
Considering these factors, Chris Weston, head of research at Pepperstone, believes that if the base case scenario plays out with a 25 basis points hike while maintaining a tightening bias, the Australian dollar should see significant buying interest, causing AUDUSD to rise by 30 to 40 pips. On the other hand, if the Reserve Bank of Australia (RBA) decides to leave rates unchanged but maintains a hawkish bias, the AUDUSD could drop by 50 pips or more.
In light of these developments, Australian bonds have rallied, with benchmark 10-year government yields dropping 22 basis points in the past two sessions, marking the most significant decline since January. These yields now stand at 4.745%, well below the 12-year high of 4.999% reached earlier in the week.
In conclusion, the Australian and New Zealand dollars are performing strongly, fueled by market confidence that U.S. interest rates have reached their peak. While the Australian dollar is anticipated to experience further gains, the upcoming actions of the Reserve Bank of Australia will play a crucial role in determining its future trajectory. Moreover, the rally in Australian bonds suggests a shift in investor sentiment towards lower rates.
