The Australian and New Zealand dollars are starting the month on the back foot, with the kiwi breaking through a key support level to trade at $0.5618. The move comes as US Treasury yields remain stubbornly high, keeping the US dollar attractive to global investors, while softer-than-expected Australian inflation has cooled expectations that the Reserve Bank of Australia (RBA) might raise interest rates again.
Why the currencies are struggling
Currency markets are heavily influenced by what investors call “rate differentials” – the gap between the yields on comparable government bonds in two countries. When US yields are high relative to those in Australia and New Zealand, the US dollar becomes more appealing because investors can earn a better return on US assets without taking on extra currency risk.
That dynamic is currently working against the antipodean currencies. Australia’s three-year government bond yield, which had been trading at a premium of about 27 basis points over US Treasuries a month ago, has now swung to roughly minus 1 basis point. Even with the Australian dollar hovering near $0.6946, the narrowing yield advantage weakens the so-called “carry trade,” where investors borrow in a low-yielding currency to invest in a higher-yielding one. With less extra return on offer, demand for the Aussie and kiwi tends to fade.
The kiwi’s drop below its support level is a technical signal that traders watch closely. When a currency breaks through a level where buyers had previously stepped in, it can trigger further selling as stop-loss orders are hit and momentum traders pile in. That can amplify the move, at least in the short term.
Softer inflation cools RBA hike bets
On the domestic front, the latest Australian inflation data came in softer than many had expected. That has led investors to scale back their bets on another rate hike from the RBA, which had been seen as a possibility if price pressures remained sticky.
Lower inflation is generally good news for households, as it reduces the pressure on the central bank to keep tightening policy. But for the currency, it’s a double-edged sword. If the RBA is less likely to raise rates, Australian bonds become relatively less attractive to foreign investors, which can weigh on the Aussie dollar.
The RBA has been navigating a tricky path, trying to bring inflation down without tipping the economy into a downturn. Earlier this year, the central bank noted that most Australian mortgage holders could withstand a significant drop in home prices, suggesting it sees the financial system as resilient. That kind of confidence gives the RBA room to keep rates higher for longer if needed, but softer inflation data reduces the urgency.
What it means for investors
For everyday investors, the weakness in the Aussie and kiwi dollars has a few practical implications.
- International travel and imports: A weaker local currency makes overseas holidays and imported goods more expensive. If you’re planning a trip abroad or buying items priced in US dollars, you’ll get less for your money.
- Diversified portfolios: If you hold global investments, a weaker domestic currency can actually boost the value of your foreign assets when converted back to local dollars. That’s a silver lining for those with overseas exposure.
- Interest rates: The shift in rate expectations suggests that mortgage rates in Australia may not rise further, which could be a relief for borrowers. However, it also means the RBA might be less inclined to cut rates soon, so don’t expect a quick drop in borrowing costs.
The broader backdrop is one of persistent global pressure on bond markets. Even as some inflation measures have cooled, US Treasury yields have remained elevated, partly because investors are demanding higher compensation for the risk of holding long-term debt. This has been a theme across markets, with the dollar holding near a two-month high as long-term yields climb. Similar dynamics have affected other currencies, such as the South Korean won, which has weakened despite record exports.
For Australia and New Zealand, much will depend on whether US yields eventually ease. If they do, the pressure on the Aussie and kiwi could lift. But if yields stay high, the currencies may remain under pressure, and investors will be watching for any further signs of weakness in local economic data.
Looking ahead
Investors will be keeping a close eye on upcoming economic releases from both countries, as well as any signals from the RBA and the Reserve Bank of New Zealand. The kiwi’s break below support could open the door to further declines, while the Aussie’s fate may hinge on whether inflation continues to soften or rebounds.
For now, the message is clear: high US yields are a powerful force, and until they relent, the Australian and New Zealand dollars are likely to stay on the defensive.
