WELLINGTON/SYDNEY: The Australian and New Zealand dollars were on the defensive on Friday, while bonds rallied sharply as news U.S. President Barack Obama had sanctioned air strikes in Iraq drove investors to seek safe-haven assets.
The main move came in the safe-haven yen which climbed across the board and knocked the Aussie down to a 10-week trough of 93.88 yen.
The Australian dollar also slipped as far as $0.9240, its weakest since early June, from $0.9269 in early trade. It was on track to end the week 0.6 percent lower.
It managed to trim losses to be last at $0.9254, after China reported a hefty 14.5 percent jump in exports for July, far above forecasts.
The Aussie is sensitive to news out of China, its key export market. Support was found at $0.9205/10.
Still, the Aussie had a sombre tone, having been hit by a central bank report and then by geopolitical news.
The currency first came under pressure after the Reserve Bank of Australia trimmed its economic growth forecasts and reiterated a stable monetary policy outlook.
It moved a notch lower after U.S. President Obama authorized air strikes in Iraq, prompting a sharp decline in stocks to the benefit of bonds.
"The market reacted to Iraq and the strength of the move is because we are heading into a weekend and that gives a strong incentives to investors to square up positions," said Matthew Johnson, debt strategist at UBS.
Mirroring a big move in U.S. Treasuries, ten-year Australian government bond yields skidded to their lowest in 14 months at 3.33 percent. They have shed a huge 23 basis points since Monday's peak.
Australian government bond futures leapt, with the three-year bond contract up 9 ticks at 97.470. The 10-year contract added 10 ticks to 96.685 in a bullish flattening of the curve.
Debt futures had already rallied on Thursday after a surprisingly high reading for Australian unemployment revived talk that the Reserve Bank of Australia (RBA) would have to cut interest rates from record low of 2.5 percent.
Interbank futures <0#YIB:> show around a 42 percent chance of an easing by December, compared with the one-in-five chance shown earlier in the week.
The New Zealand dollar was nursing losses at $0.8442, after hitting a high of $0.8496 in the offshore session. It was on track to post a 0.7 percent decrease for the week.
The failure to push through the $0.8500 level along with negatives including mixed data, soft commodity prices and a central bank on hold were all weighing on kiwi.
"Risk aversion looks to be the game at the moment, with the U.S. dollar going up, and kiwi lower on the Aussie," said Westpac senior strategist Imre Speizer.
Key support was found at $0.8400, while $0.8500 is seen as the first hurdle higher.
The kiwi was softer against most majors, down about 0.2 percent against the Aussie, yen and the euro.
Second quarter retail data and monthly manufacturing activity figures will be released next week.
New Zealand government bonds trading sharply higher, sending yields as much as 12 basis points lower at the long-end.
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