Australia, NZ dollars resume bull run, bonds outperform

SYDNEY: The Australian and New Zealand dollars resumed their uptrend on Wednesday as dovish comments from Federal Reserve members undermined the US dollar, while local bonds also managed to outperform their US counterparts.

The Aussie bounced to $0.7775 and away from a $0.7666 low touched at the start of the week. The next chart barriers are $0.7798 and the recent peak at $0.7819.

The kiwi dollar firmed to $0.7230 from Monday's trough at $0.7148, which now becomes major chart support. Resistance lies around $0.7280 and the January peak of $0.7314.

The US currency took a knock when a couple of Fed presidents played down the risk of an early tapering of asset purchases, helping spark a rally in Treasuries.

That was mirrored in the Australian bond market where 10-year yields eased a touch to 1.09%, from a seven-month top of 1.118%.

Treasuries had sold off last week on expectations a Democratic controlled US Senate would allow a much larger fiscal spending program, and the borrowing to fund it.

Australian bonds managed to fare better than their US counterparts, with the spread between 10-year yields swinging to -0.2 basis points from +7 basis points early last week.

"The out performance of AUD rates against USTs is justified, in our view, given the relative fiscal outlooks of the two countries," said Jack Chambers, a rates strategist at ANZ.

"We think this can persist and the 10-year spread go negative."

He noted Australian bond issuance over the next six months was planned at A$76.5 billion ($59.4 billion), down from the A$153.5 billion sold since the start of the 2020/21 financial year last July.

The Australian Office of Financial Management (AOFM) is due to outline its latest borrowing plans on Friday, which could include a syndication of new bond lines.

With three-year yields pinned near 0.1% by buying from the Reserve Bank of Australia (RBA), the yield curve has steepened markedly in recent weeks.

Yields on 10-year paper widened to 97 basis points over three-year notes, up from 65 basis points at the start of November.

Barring a brief spike during the market mayhem of last March, that was the biggest gap since July 2015 and a boon to banks that can borrow short and lend long.