Australia, NZ dollars swept lower as markets re-think rate outlooks

SYDNEY: The Australian and New Zealand dollars nursed painful losses on Wednesday as investors abandoned bets on higher interest rates domestically, while tighter coronavirus lockdowns in Europe pushed bond yields down globally.

The Aussie was looking shaky at $0.7609, having skidded 1.5% overnight to test the 100-day moving average at $0.7608. A break here would likely see a pullback to the February trough of $0.7564.

The kiwi dollar was hammered to $0.6995, after shedding 2.3% on Tuesday in its biggest loss in a year.

Analysts at TD Securities noted the kiwi sliced through its 100-day moving average at $0.7119 and major chart support at $0.7100/05, which had held since the start of the year.

"We think there is a strong technical case for more near-term weakness in the pipeline," TD Securities said. Support around $0.7000 was already being tested, opening a possible retreat to the 200-day moving average at $0.6861.

The sell-off was triggered by New Zealand government's plans to close tax loopholes that favoured investor buying of houses, aiming to cool red-hot prices in the sector.

Markets reacted by assuming this would lessen pressure for any early tightening in monetary policy from the Reserve Bank of New Zealand (RBNZ).

"It points to lower house prices, higher rents, less future monetary policy tightening required and less growth in housing debt going forward," said NAB senior FX strategist Rodrigo Catril.

Investors sharply scaled back wagers on rate hikes, with one-year overnight indexed swaps dropping to match the official rate at 0.25%, having been up at 0.30% early in the week.

Yields on five-year paper fell a steep 9 basis points to a one-month low of 0.955%, while 10-year yields dived 22 basis points to 1.56%.

The Australian housing market has also been running hot, though nothing like the 25% annual growth seen in New Zealand prices, and there is a risk regulators will tighten lending rules later this year.

However, the conservative government has often ruled out any changes to taxes for investment in housing and is unlikely to follow New Zealand's example.

Australian bonds still rallied, matching a move in Treasuries, with 10-year yields dropping to 1.695% from 1.84% at the start of the week.

Three-year bond futures firmed to 99.750, and further away from a low of 99.615 touched last month.