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Markets

Australia, NZ dollars up as yield spreads widen in their favour

  • The RBA will be buying bonds at a faster pace than the government is selling them, while also expanding its balance sheet more quickly than the US Federal Reserve.
Published February 4, 2021

SYDNEY: The Australian and New Zealand dollars crept up on Thursday as rising stock markets spoke of positive global risk sentiment, while higher bond yields at home gave the currencies an edge over their US counterpart.

The Aussie firmed to $0.7642 and away from a five-week low of $0.7564 touched on Tuesday. It now faces resistance at $0.7662 and $0.7703.

The kiwi dollar was up at $0.7212, having recovered from a $0.7136 trough early in the week. It needs to clear resistance around $0.7246 to keep the rally going and is finding support from a sharp rise in local bond yields.

Yields on 10-year bonds have shot to their highest since the market mayhem of last March at 1.41%, having climbed almost 25 basis points in just a week.

The spread with US Treasuries had in turn swung to +26 basis points, from -5 basis points at the start of January.

Yields have been on the rise since the Reserve Bank of New Zealand (RBNZ) trimmed the amount of bonds it would buy this week, and took off on Wednesday when local jobs data proved far stronger than forecast.

"It leaves a picture of economic strength and shrinking capacity," said Westpac analysts Imre Speizer.

"Given such fundamental support for the NZD, we are watching for an upside break above $0.7225," he added. "We retain our long-held bullish outlook, targeting $0.7500 by April."

Australian yields have moved higher even as the Reserve Bank of Australia (RBA) extended its bond buying program by another A$100 billion ($76.5 billion) and predicted cash rates would stay at 0.1% until at least 2024.

The RBA will be buying bonds at a faster pace than the government is selling them, while also expanding its balance sheet more quickly than the US Federal Reserve.

That should help limit the increase in local bond yields over time, though the 10-year yield is still up a sharp 18 basis points in the past week at 1.225%.

Likewise, 10-year bond futures were down 4.5 ticks at a 10-month low of 98.7750.

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