Australian Dollar Steadies Amid Euro and Kiwi Weakness

The Australian dollar steadied against the US dollar on Tuesday, benefiting from demand against the New Zealand dollar and euro. The Aussie edged up 0.3% overnight to $0.6968, recovering from a 13-week low of $0.6904. The currency received indirect support from euro selling, driven by political concerns, which pushed the euro to its lowest level since late 2024 at A$1.6061. Against the New Zealand dollar, the Aussie climbed 0.6% overnight to NZ$1.2464, nearing its recent peak of NZ$1.2488.

Australian 10-year bond yields rose near 15-year highs to 5.408%, but remained below US Treasury yields, with the spread narrowing to 10 basis points from 39 a month earlier. Australia's government deficit and debt levels are significantly lower than the US, attracting demand from central banks seeking to diversify away from Treasuries. The Reserve Bank of Australia has proactively raised interest rates by a full percentage point to 4.60% to combat inflation, though consumer sentiment has taken a hit due to steep losses in house prices.

Markets are now betting that the RBA will skip another hike in November but may raise rates to 4.85% early next year if inflation does not cool as expected. Meanwhile, the New Zealand dollar struggled, stuck at $0.5598 after touching a 10-month low of $0.5581. A survey showed that 43% of firms expect business conditions to improve, up from 8% the previous quarter, but current activity measures were softer, leaving investors uncertain about the Reserve Bank of New Zealand's next move.

The local bond market continued to outperform the rout in Treasuries, driving the 10-year yield spread to -23 basis points, a level not seen since late 2020. Swaps imply a 58% chance of a quarter-point rate hike by the Reserve Bank of New Zealand at its October 28 meeting, with a move in December more than fully priced in.