Australia, New Zealand dollars at multi-month lows as yields buffers shrink

SYDNEY: The Australian and New Zealand dollars were pinned around multi-month lows on Friday as the greenback extended its bull run through major chart levels, while bonds found some relief from a rare rally in Treasuries.

The Aussie was heading for its fourth straight week of losses as US yields surged and shrank the premium offered by Australian debt to the smallest in a year.

That left the Aussie down at $0.6920, having slipped 0.2% overnight to hit a three-month trough of $0.6904.

It was down a hefty 1.4% for the week and threatening previous lows at $0.68665 and $0.6834.

The currency drew some indirect support from a broad fall in the euro as concerns about French debt saw the single currency skid 0.6% to A$1.1624.

The kiwi dollar huddled at an 11-month trough of $0.5592, after a break of $0.5627 triggered another wave of selling. Major support now lies at $0.5581 and a breach would risk a retreat to $0.5485.

Australian bonds have fared a bit better than the currency as a pullback in wagers for an October rate hike saw 3-year yields drop 11 basis points on the week to 4.898%.

While the Reserve Bank of Australia did raise rates to a 15-year high of 4.6% on Tuesday, investors got the impression policymakers wanted to gauge the impact of its tightening before moving again.

A sharp downturn in the housing market has also combined with a steady rise in unemployment to lower the probability of an October hike to 22%, and even a December move is now put at just 38%.

“While currently inflation concerns outweigh growth concerns, the RBA Board will need to remain attentive to emerging downside risks over coming months,” said Adam Bowe, head of Australia portfolio management at PIMCO.

“With economic cracks emerging, a moderating fiscal impulse, and strong demand for Australian dollar denominated bonds, we view Australian duration as attractive at current levels.”

That demand has helped cushion Australian government bonds from the fallout in Treasuries, shrinking the 10-year yield premium to a one-year low of 11 basis points.

It is that outperformance that has undermined the Aussie’s interest rate buffer on the greenback.