The Australian and New Zealand dollars were both heading for sizable weekly falls on Friday as their yield buffers over the US dollar shrank to the smallest in over 17 years, undermining their appeal as carry trades. The Australian dollar was huddled at $0.7593 and nursing losses of 0.9 percent for the week so far.
Its kiwi counterpart edged up to $0.6863 and away from a low of $0.6836, but was still down 1 percent on the week. The Aussie was thumped mid-week by surprisingly soft wage data and never recovered. A solid jobs report provided little support since employment has been surging for a year now but has had absolutely no impact on wages.
The Reserve Bank of Australia (RBA) acknowledged the new normal last week by sharply cutting its inflation forecasts. It now no longer expects underlying inflation to reach the floor of its 2 to 3 percent target band until mid-2019, over a year later than originally hoped. The gap between Australian and US two-year government yields has dwindled to 9 basis points, down from 60 in September and the smallest spread since mid-2000.
Likewise, yields on New Zealand government two-year debt are just 29 basis points above those in the US, with the spread having more-than-halved since September. Australian government bond futures paused after two strong sessions, with the three-year bond contract steady at 98.040. The 10-year contract eased half a tick to 97.2950, having hit a 10-week peak on Thursday.
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