Australia, NZ dollars in holding pattern amid US debt impasse

The Australian and New Zealand dollars struggled for direction on Tuesday, after U.S. debt ceiling talks between President Biden and House speaker McCarthy failed to yield any progress, even as both sides vowed to keep talking.

The Aussie AUDUSD was little changed at $0.6655, after trading rangebound between $0.6627 and $0.6667 overnight. It has support at its 2023 trough of $0.6573 and faces major resistance at the 200-day moving average of $0.6710.

The kiwi NZDUSD was also flat at $0.6287, having risen 0.2% overnight to as high as $0.6291. It has been buoyed a little by market bets that the Reserve Bank of New Zealand may surprise with an outsized 50 basis point hike on Wednesday after the government's budget added to inflationary pressures.

It has support at the 200-day moving average of $0.6156.

After talks stalled last week, President Joe Biden and House Speaker Kevin McCarthy on Monday again failed to reach an agreement on how to raise the U.S. government's debt ceiling, but the two sides said they would keep talking.

"My understanding is that the debt limit has been raised 73 times or something, so I think our expectation would be that there will be a deal as at some point," said Brian Coulton, chief economist at Fitch Ratings.

"But you know, you can have quite a material short-term impact on the economy from the brinkmanship without getting into the scenario of an actual default."

Outside of the debt drama, several Federal Reserve officials joined the hawkish camp. Markets are still leaning towards a pause from the Fed next month, but have pushed back the first rate cut to November or December, from July previously. (FEDWATCH)

Minneapolis Fed President Neel Kashkari said that it was a "close call" as to whether he'd vote to hike again or pause at next month's meeting. St. Louis Fed President James Bullard said another 50 basis points of hikes might be required.

Australian bond yields tracked global counterparts higher. The benchmark ten-year yields AU10Y rose 6 basis points to a 2-1/2 month high of 3.648%, and three-years were up 4 bps to 3.376%.