Australian and New Zealand dollars are at risk of falling due to China's problems and US yields

18 Aug 2023 , 10:37 AM

On Friday, the Australian and New Zealand dollars faced a sixth straight week of losses as bearish wagers crushed support amid worries about China’s faltering economy and rising U.S. bond yields.

The Australian dollar was locked at $0.6411 after falling 1.3% for the week to a nine-month low of $0.6365. Prior to its 2022 bottom at $0.6170, there is not much chart support until $0.6273.

The kiwi also hit a nine-month low of $0.5903 before falling 1% for the week to $0.5924. Support is located around $0.5840, and the nadir for 2022 is still some distance away at $0.5512.

Stresses in China’s financial and real estate sectors, which were exerting pressure on the yuan despite Beijing’s efforts to stabilize the currency, added to concerns about the country’s economy.

As liquid substitutes for the overall yuan and China risk, investors were shorting the Australian and New Zealand dollars.

Beijing hasn’t shown much interest in such a debt-financed financial splash yet, leaving the Australian to flap in the wind.

Meanwhile, a string of encouraging economic reports from the United States have caused markets to drastically lower their expectations for rate reduction in 2019 and, when combined with a big influx of new issuance, have raised longer-term Treasury yields.

This has caused bond markets around the world to struggle while strengthening the U.S. currency overall and especially against the yen.

The Reserve Bank of Australia (RBA) has signaled that it might not need to increase short-term rates again, but Australian 10-year yields have soared to virtually their highest level since 2014 at 4.29%.

The market has priced practically all risk of a rate hike in September and only a 44% chance of another move altogether due to negative surprises in wage and employment statistics this week.

The 10-year yield in New Zealand has risen to 5.098%, its highest level since the beginning of 2011, despite the fact that the market once more sees only a remote possibility of further rate increases.

Even though the Reserve Bank of New Zealand (RBNZ) slightly increased its rate forecast this week, policymakers felt satisfied that they had already taken sufficient steps to reduce inflation.

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