Australia, NZ dollars join bond rout as markets price for multiple hikes

The Australian and New Zealand dollars fell on Thursday as markets rushed to price in ever more U.S. rate hikes, battering bonds and sending short-term yields to their highest in almost three years.
 

The Aussie was stuck at $0.7094, having shed 0.5% overnight to test the recent two-month trough of $0.7090.
 

Strong resistance stands around $0.7180, while support lies at $0.7083 and the December low of $0.6994.
 

The kiwi dollar was down at $0.6635, having also lost 0.5% overnight to its lowest since late 2020. This would be its sixth session of losses and the next major bear target is around $0.6590.
 

The latest drubbing came after Federal Reserve Chair Jerome Powell took a decidedly hawkish tone after their policy meeting, refusing to rule out hiking rates at every one of their remaining seven meetings this year.
 

That increased pressure on local bonds which were already reeling from an alarmingly high inflation reading, and three-year yields spiked 10 basis points to their highest since April 2019 at 1.313%.
 

The Fed's aggressive tone only added to market speculation the Reserve Bank of Australia (RBA) will have to follow with hikes of its own, with a move to 0.25% fully priced in by May and rates near 1.25% by year end.
 

"The market remains hawkishly priced relative to even our new view that the first hike will come in August. We see the cash rate being 0.5% by year-end, so that should provide some headwinds to further yield rises," said Damien McColough, head of rates strategy at Westpac.
 

"However we continue to counsel that bond rallies should be short lived and sold into over the medium term." The RBA meets on Feb. 1 and is now considered likely to end its bond buying campaign and sharply lift its inflation forecasts, opening the door to a hike before 2023.
 

The Reserve Bank of New Zealand (RBNZ) has already raised rates twice and is considered certain to hike again later this month, with some chance it might move by 50 basis points (bps) after inflation jumped to a three-decade peak.
 

"We expect the RBNZ to keep up the pace, lifting the cash rate at least another seven times to 2.5% by mid-2023," said Jarrod Kerr, chief economist at Kiwibank.
 

"However, the uncertainty around the economic impact of the Omicron variant justifies the RBNZ's preferred approach to move in the traditional 25bps increment."