SYDNEY - The Australian and New Zealand dollars were back from the brink on Thursday as dovish signals from the U.S. Federal Reserve shoved Treasury yields sharply lower and took the U.S. dollar along for the ride.
The Aussie was back up at $0.6975, having been down at a three-week low of $0.6911 overnight. The bounce was timely for bulls as the currency had broken major support at $0.6950 and was looking very vulnerable from a technical viewpoint.
Both had been under pressure from concerns a recent upbeat U.S. jobs report would deflect the Fed from cutting rates this month. So it was a major relief when Fed Chair Jerome Powell on Wednesday reiterated the case for acting as insurance against global uncertainties.
Markets took that as affirming the case for a quarter-point cut in rates this month, and possibly an even larger move. The probability of a half-point easing jumped to 25%, from zero ahead of Powell's remarks.
Futures 0#FF: have almost 100 basis points of cuts priced in by late next year, driving yields on two-year Treasuries US2TY=TWEB down 12 basis points to 1.81%.
"A cut is coming in July," said Tom Porcelli, chief U.S. economist at RBC Capital Markets, who had long argued an easing was not needed from an economic standpoint.
"If Powell and Co believe the backdrop calls for cuts, it is pointless to fight this eventuality," he added. "Powell is incredibly worried about the ramifications from trade tensions and that is enough for him to cut."
Porcelli now expects the Fed to ease again in September.
For currencies, such an outlook effectively counters the 50 basis points of easing already delivered by the Reserve Bank of Australia (RBA) and makes it much more likely the Reserve Bank of New Zealand (RBNZ) will have to cut again at its next policy meeting on Aug. 7.
Indeed, the Aussie is actually higher now than it was before the RBA first eased on June 4, and well above its recent five-month trough of $0.6832.
Investors assume the RBA will have to move again if only to stop the Aussie from rising even more and hurting the country's export sector, one of the brighter spots in the economy.
Futures 0#YIB: imply a 90% chance of a further quarter-point cut to 0.75% by Christmas, and a non-trivial possibility of ultimately reaching 0.5%.
Yields on Australian three-year paper AU3YT=RR duly dropped back to 0.944%, and away from a high of 1.00% hit early in the week. The 10-year bond future contract YTCc1 bounced to 98.655, from an overnight low of 98.6000, and was not far from all-time peaks.
Yields on New Zealand two-year bonds NZ2YT=RR dipped to 1.158%, just above their historic low of 1.123%.
(Editing by Shri Navaratnam) ((Wayne.Cole@thomsonreuters.com; 612 9321 8162; Reuters Messaging: email@example.com))