Australia, NZ dollars on defensive as spreads shrink

SYDNEY: The Australian and New Zealand dollars were back on the defensive on Thursday as jitters in European debt markets benefited the super-liquid greenback most, while adding to pressure on local bonds.

Concerns about French deficits widened the spread between French and German 10-year bond yields to the largest since 2012, with the strain spreading to Italian and Greek bonds overnight.

The stress dragged the euro down to a 22-month trough against the Aussie at A$1.6039, but also undermined risk sentiment and gave the greenback a bigger lift.

That left the Aussie at $0.6965, having fallen 0.3% overnight.

The pullback leaves resistance between $0.6990 and $0.7004, with support at the recent 13-week low of $0.6904.

The kiwi dollar hovered at $0.5605, after losing 0.4% overnight.

A break of the 10-month low at $0.5581 would threaten a retreat to at least $0.5485.

The selloff of global bonds has pushed up Australian 10-year yields over the past few months to a 15-year high of 5.432% , but Treasury yields have risen far further.

As a result, the premium paid for Aussie debt has shrunk to just 8 basis points, from around 40 basis points in mid-September.

Carol Kong, an FX analyst at CBA, believes the shrinking spread will take the Aussie to $0.6600 by early next year.

“The main weights on AUD/USD will be less positive, and eventually negative, interest rate differentials — partly because we expect the Reserve Bank of Australia to cut the cash rate in 2027,” said Kong. Markets are still priced for another RBA hike by the middle of next year, with no cuts implied for 2027.

“A sharp equity market correction, a further sharp rise in bond yields or an escalation of geopolitical conflict that weakens global growth expectations could also quickly reverse risk appetite and pull AUD/USD lower,” Kong added.