Australia, NZ dollars pressured as bond yields hit multi-month lows

SYDNEY: The Australian and New Zealand dollars were under pressure on Thursday as a bout of global risk aversion hit equities and lowered bond yields, while a further lockdown in Sydney challenged the domestic economic outlook.

The Aussie slipped 0.3% to $0.7462 and was a long way from the week's top of $0.7599.

It was now threatening the recent seven-month low of $0.7445 and a break would risk a much deeper retreat to $0.7350 and lower.

The kiwi dollar dropped 0.4% to $0.6989 and further away from the peak of $0.7104 hit early in the week. Support lies at $0.6947 and the recent trough of $0.6923.

New Zealand dollar climbs as market scents risk of early rate hike

The Aussie was not helped by news the lockdown in Sydney would be extended to a third week as the outbreak of the Delta variant showed no sign of slowing.

The disruption to the economy only underlined the need for continued stimulus from the Reserve Bank of Australia (RBA), with Governor Philip Lowe again emphasising that interest rates were not likely to rise until 2024.

Asked why markets were pricing in a hike as early as October next year, Lowe said they might not properly understand the bank's reaction function.

The RBA was determined to get inflation back into its 2-3% target band and that would take a sustainable lift in wages growth above 3%, something not seen in a decade.

"The emphasis on wages means the RBA is likely to lag other central banks in tightening despite the faster-than-expected recovery in activity and employment," said NAB economist Taylor Nugent.

"Our view is that there is a risk that the RBA hikes in 2023 and markets should price this risk, though NAB's central view is for first hikes in 2024."

Lowe's dogged dovishness helped pull three-year bond yields down to 0.379%, from a top of 0.489% early in the week. Yields on 10-year bonds fell to a five-month low of 1.337%, a long way from this year's peak of 1.97%.

That in turn shrank the spread over Treasuries to 4 basis points, from a top of 13 basis points on Monday.

New Zealand 10-year bond yields dropped back sharply to 1.588%, the lowest since late April, even though markets have been pricing in a rate hike there as early as November.