The Australian and New Zealand dollars halted their recent slide on Wednesday as a global bond selloff took a pause, giving the two currencies some breathing room after weeks of pressure. According to Reuters, traders are now pricing in just a 25% chance that the Reserve Bank of Australia (RBA) will raise its policy rate again in November.
The move comes after a turbulent period for risk-sensitive currencies. When bond yields spike sharply, it often rattles global markets and weighs on currencies like the Aussie and kiwi, which are seen as higher-risk bets. A calmer bond market, even temporarily, can provide support.
Why bond yields matter for the Aussie and kiwi
Government bond yields are essentially the interest rates that investors earn for lending to a government. When yields rise quickly, it can signal that investors expect higher inflation or that central banks will keep interest rates elevated for longer. That tends to make safer assets like US Treasuries more attractive, pulling money away from riskier investments and currencies.
For the Australian and New Zealand dollars, the recent global bond selloff has been a headwind. Both currencies had been sliding as yields climbed, and the pause in that move has helped them stabilise near recent lows. But the bigger driver for these currencies is still what central banks are doing with interest rates.
RBA's rate path in focus
Last week, the RBA raised its official cash rate to 4.60%, a move that surprised many economists and investors. The question now is whether that was a one-off adjustment or the beginning of another tightening cycle. The market's 25% probability for a November hike suggests that investors are not fully convinced the RBA is done, but they also aren't expecting a rapid series of increases.
The RBA's next policy meeting is scheduled for October 13th, and that will be a key date for the Aussie dollar. If the central bank signals that further hikes are likely, the currency could strengthen. If it suggests that rates have peaked, the Aussie could come under renewed pressure.
For New Zealand, the kiwi dollar is similarly sensitive to its own central bank's stance, as well as to global risk sentiment. The Reserve Bank of New Zealand has also been on a tightening path, though it has recently paused its hiking cycle.
What it means for investors
For everyday investors, currency movements can have a direct impact on portfolios, especially if you hold international investments or travel abroad. A weaker Aussie dollar, for example, means that overseas holidays become more expensive, and imported goods can cost more. It can also affect the returns on global investments when converted back into local currency.
For those with exposure to Australian or New Zealand assets, the currency's stability is a welcome sign, but the underlying uncertainty about interest rates remains. The bond market's reaction to central bank policy will continue to be a key driver for these currencies in the coming weeks.
Investors should also keep an eye on global bond markets more broadly. If the selloff resumes, the Aussie and kiwi could resume their slide. If it continues to calm, they may find more solid footing. The RBA's October meeting will be a critical event to watch, as it will provide clarity on the future path of Australian interest rates.
In the meantime, the fact that traders are pricing only a 25% chance of a November hike suggests that the market is leaning towards the view that the RBA's last move was a one-off. But as we've seen many times this year, central banks can surprise, and the data between now and then will be crucial.
For a broader perspective on how rate expectations are affecting markets, you can read about stocks rising on bets that the Fed will pause. And for a look at how rising bond yields are pressuring equities, see New Zealand stocks falling under yield pressure. Additionally, the Aussie dollar's recent steadiness offers more context on the currency's reaction to yield moves.
