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Markets

Australia, NZ dollars find some support from upbeat economic news

  • "If the AOFM sticks with issuance of A$230 billion there will be a significant pre-funding of next year's deficit, which is on track to be much smaller than expected."
31 Mar 2021

SYDNEY: The Australian and New Zealand dollars steadied on Wednesday as upbeat economic news combined with rising bond yields to support the currencies in the face of broad US dollar gains.

The Aussie was holding at $0.7604, having recoiled from a peak of $0.7664 overnight. That left it uncomfortably close to the recent two-month trough of $0.7564 and a break could see a retreat to $0.7495/7500, or even the 200-day moving average at $0.7378.

The kiwi stood at $0.6983, after falling from a top of $0.7033 on Tuesday. Support lies at the recent low of $0.6944 and the 200-day moving average at $0.6877.

Aiding sentiment was surveys from China showing surprisingly upbeat activity in both manufacturing and services, with the latter jumping to a very strong 56.3.

China is Australia's single biggest export market and a major driver of prices for its key commodity exports.

Australian data also showed a huge 21.6% increase in approvals to build new homes in February, far above forecasts of 5.0% and recouping all of January's unexpected drop.

Approvals to build new houses surged 15.1% to a record high as government grants and rapidly rising prices flowed through to more construction, supporting jobs and consumption.

With the economy outperforming, government finances are also in far better shape than feared just a few months ago.

Analysts at CBA estimate the 2020/21 budget deficit could turn out at A$145 billion ($110.32 billion), a massive improvement of A$55 billion on government forecasts.

The underlying cash deficit for 2021/22 could be as low as A$80 billion, though that assumes no increase in government spending plans.

Hayden Dimes, an economist at ANZ, tips a deficit of around A$155 billion for this year, which could lead to lower issuance.

The governments' Office of Financial Management (AOFM) currently plans to sell A$230 billion of debt in 2020/21 and has already issued A$174 billion.

"If the AOFM sticks with issuance of A$230 billion there will be a significant pre-funding of next year's deficit, which is on track to be much smaller than expected."

The prospect of a sharp reduction in supply could help bond prices, which have been pressured by the latest sell-off in US Treasuries. Yields on 10-year paper were up at 1.82%, having climbed 11 basis points for the week so far.