Australia, NZ dollars on the ropes after another punishing week

The Australian and New Zealand dollars were under pressure on Friday as fears of a global downturn crushed commodity prices and inflicted another punishing week for risk sentiment.

The Aussie was pinned at $0.6700, having shed 2.1% during a whipsaw week that saw it rise as high as $0.6915 at one stage. That left it precariously poised above the July trough of $0.66825 and a return to ground last trod in May 2020.

The kiwi had lost 2.3% for the week so far to rest at $0.5957, having already hit a 2-1/2 year low. The next support was $0.5921, a low from May 2020.

Adding to the pressure was a slide in the Chinese yuan to beyond 7.0 per dollar. Many investors use the Aussie as a proxy for the yuan given China is Australia's single biggest export market and a driver of commodity prices.

Interest rate differentials have also been lifting the US dollar as the market added to wagers of more outsized rate hikes from the Federal Reserve.

That has seen the Australian 10-year bond yield spread over Treasuries shrink to just 29 basis points, from more than 60 basis points a month ago.

The hawkish Fed outlook has in turn stoked speculation the Reserve Bank of Australia (RBA) will have to stay aggressive on policy and hike rates by another 50 basis points next month.

RBA Governor Philip Lowe on Friday reiterated that at some point it would be ready to slow the pace of tightening, but noted the economy was still running strongly.

"In light of recent data and the Governor's statement, we are now of the view that when the Board debates the decision in November, it will conclude that the balance of inflation risks argues against a step down in the pace of rate rises," said Alan Oster, chief economist at NAB.

He now expects the RBA to lift rates by 50 basis points in October to 2.85% and by a further 25 basis points in November before pausing.

He was not alone.

"We still think the RBA is more likely than not to tighten by 50bp in October," said David Plank, head of Australian economics at ANZ, who sees rates reaching 3.35% in December.

"We see this as a restrictive setting that will eventually slow the economy quite sharply," he added. "But the risk is the RBA's tightening cycle may be longer and higher than we currently expect."

The market shares the same concerns as futures imply rates could peak as high as 3.85% by the middle of next year.