NZ dollar takes flight with hawkish RBNZ, leaves A$ earthbound

SYDNEY: The New Zealand dollar was ending the week with hefty gains on Friday as the prospect of early interest rate hikes widened its yield advantage over Treasuries, leaving its Australian counterpart trailing far behind.

The Aussie was idling at $0.7745, having spent the entire week trapped in a tight $0.7706/0.7796 range. A break of $0.7675 or $0.7813 is needed to end the deadlock and spark a new trend.

The story was very different for the kiwi, which was up at $0.7276 having climbed 1.7% for the week. It reached a three-month peak of $0.7316 at one stage, though that proved to be stiff resistance.

Support now comes in at $0.7266 and $0.7210, while the major bull target is the February top of $0.7463.

The kiwi took off when the Reserve Bank of New Zealand (RBNZ) shocked many by projecting a rate hike as early as the middle of next year, making it one of only a handful of central banks to talk of tightening.

"We think it makes sense to look for FX gains in currencies whose central banks have made hawkish pivots," said Mazen Issa, a senior FX strategist at TD Securities.

"The NZD is no exception; we are tactically long NZDUSD this week, but we think there could be larger gains ahead towards $0.7500."

For bonds, the week was a rough one. Yields on 10-year bonds fell as low as 1.79% ahead of the RBNZ meeting only to end the week up at 1.87%.

That widened the spread over Treasuries to 26 basis points, up from zero a month ago.

Two-year yields stood at 0.36%, having been as low as 0.275% pre-RBNZ. Bank bill futures for September next year lost 11 basis points on the week to 99.22, implying a three-month rate of 0.78%.

Meanwhile, Australian 10-year yields fell five basis points on the week to 1.62%, shrinking the premium over Treasuries to a single basis point.

The Reserve Bank of Australia (RBA) holds its June meeting next week and is expected to reiterate that rates are unlikely to rise until 2024, two years after the RBNZ's projection.

Analysts polled by Reuters suspect a hike will come sooner, but still not until mid-2023.

While the economy has recovered more rapidly than anyone expected, the latest week-long coronavirus lockdown of the state of Victoria would hit growth this quarter and provide a further reason for the RBA to stay dovish.