AUD/NZD Steady Near Multi-Month Highs Amid Bond Selloff and Inflation Concerns

The Australian and New Zealand dollars continue to hover near their multi-month highs as investors remain cautious due to the global selloff in bonds. The selling pressure across global debt markets has driven Australian 10-year bond yields up by 9 basis points to a five-month high of 5.166%. Meanwhile, 3-year futures fell by 7 ticks to 95.280.

The treasuries market led the rout due to concerns about US budget deficits and debt levels, while local markets have come under pressure from expectations that interest rates may need to remain higher for longer to tame inflation. The Reserve Bank of Australia (RBA) is expected to hike rates by a quarter point to 4.60% at its meeting on September 29, with the market implying a 54% chance.

The hawkish outlook comes despite data showing that the economy hit the brakes in the second quarter. The main GDP report is due on Wednesday and analysts forecast a meager 0.3% rise in the quarter, with annual growth slowing to 1.8% from 2.5%. Core inflation remains stuck at a painfully high 3.6%, pressuring the RBA to deliver a fourth rate hike this year.

Paul Bloxham, head of Australian economics at HSBC, argued that 'the RBA has no easy choices from here'. If the GDP growth print is weak, as expected, the economy will be close to stagflation. Conversely, if the GDP print shows stronger than expected growth, the RBA may be forced to lift its cash rate further, increasing the risk of pushing the economy into a recession.