Australia, NZ dollars off highs, 10-yr yields hit six-month top

SYDNEY: The Australian and New Zealand dollars ran into profit taking on Friday as markets speculated on when the U.S. Federal Reserve might taper its asset buying, sending longer-dated Australian yields to six-month highs.

The Aussie eased off to $0.7756, and away from a 2-1/2 year peak of $0.7819. Yet it was still up 0.8% for the week, on top of a 1.2% gain the previous week.

The next targets are more 2018 tops at $0.7916 and $0.7988, followed by $0.8136, which was the highest since mid-2015.

The kiwi dollar faded to $0.7252, from a top of $0.7314, but was still 1% higher on the week. Bulls are now eyeing highs from early 2018 at $0.7395 and $0.7437.

Dealers said speculators pared some short positions in the U.S. dollar on speculation the Fed would not now increase its bond buying program, given the rollout of coronavirus vaccines had improved the economic outlook for later in the year.

Instead, some officials had talked about tapering the purchases late in 2021, sooner than many in the market had anticipated.

That combined with talk of more fiscal stimulus as Democrats took control of the Senate to push longer-term Treasury yields higher and gave the U.S. dollar a lift after weeks of losses.

Australian 10-year yields followed almost in lock step to reach 1.09% and keep the spread with the U.S. around zero. That left yields up 11 basis points for the week and at the highest since June.

Three-year yields remain pinned near the Reserve Bank of Australia's (RBA) target of 0.10%, thus widening the spread with 10-year paper to 98 basis points which, barring a brief spike last March, is the steepest since mid-2015.

David Plank, head of Australian economics at ANZ, said the rise of the Aussie was an effective tightening in conditions which argued for the RBA to extend its A$100 billion bond buying program in coming months.

"We think the RBA will be wary about making any policy choices that add to the upward pressure on the AUD," said Plank in a note.

"And any hint that the RBA is thinking of winding back QE or adjusting its 3-year bond target could put considerable upward pressure on the AUD."