Australia, NZ dollars deadlock breaks to downside, risks further losses

SYDNEY: The Australian and New Zealand dollars were on the defensive on Friday after weeks of deadlock broke to the downside when a scare on US policy tapering slugged risk sentiment.

The Aussie was nursing a grudge at $0.7661, having shed 1.1% overnight to crack major support at $0.7675.

The break of a month-long range triggered a round of stop-loss selling and turned the technical background bearish, with 0.7617 the first chart target.

After that are a string of lows from March and April in the $0.7565/7585 band and ultimately the 200-day moving average at $0.7534. A rally above $0.7715 would suggest the downside break was a false move and restore the old range.

The kiwi dollar was down at $0.7146 after diving 1.2% overnight, though it levelled out just above major support at $0.7116. A break would open the way to at least $0.7065, while the 200-day moving average is still some distance away at $0.7019.

The lunge lower came after strong US data pointed at upside risk for the payrolls report due later Friday and also to mounting inflationary pressures.

That stoked fears the Federal Reserve might consider when to start tapering its asset buying, scaring equities and lifting bond yields.

The Reserve Bank of Australia (RBA) is expected to start a tapering of its own at its July 6 policy meeting, with most of the market assuming it will not extend its three-year yield target to the November 2024 bond.

"The RBA Board is likely to decide that there will be no extension because such action would imply no tightening till 2025," said Westpac chief economist Bill Evans.

He also expects at least one more round of bond buying after the current round of A$100 billion ($76.60 billion) ends in September.

"We expect the Governor to announce an open ended A$5 billion per week purchase programme to be reviewed later in 2021 to be introduced following the completion of QE2," Evans said.

This would take additional purchases to A$150 billion, and the total bought to A$350 billion.

RBA Deputy Governor Guy Debelle underlined the importance of the programme this week, arguing that without it both the Aussie and borrowing costs in the economy would be higher.

The bond market has been untroubled by that outlook so far, with 10-year yields near recent lows at 1.64% and a mere 1 basis point above Treasuries.