Australia, NZ dollars broadly steady as action shifts to bonds

SYDNEY: The Australian and New Zealand dollars were sidelined on Friday as bonds enjoyed their best week in over a year after investors dismissed a high reading on US inflation as fleeting and no threat to super-easy monetary policy.

The Aussie was dozing at $0.7747, having spent the entire week in a tight range of $0.7719/$0.7765.

The New Zealand dollar was marginally softer at $0.7187.

For the week, both the currencies were little changed.

The lacklustre trading comes as prices of iron ore , Australia's top export earner, are volatile while milk prices, New Zealand's No.1 export, are on track for a record high. It also comes amid expectations New Zealand's central bank could raise rates earlier than previously expected and as Australia's central bank signalled a policy shake-up in July.

"On a 100-day basis, all major drivers of the cross have failed to spark a move," ANZ analysts wrote in a note.

"This is not because AUD/NZD is moving contrary to fundamentals. It is simply that it has stopped moving. Historic volatility, on almost all tenors, is closing in on a multi-decade low. But that can't last forever."

During the year so far, the Aussie is barely changed against its kiwi counterpart.

Investor activity has shifted to bonds instead, with yields on Australian 10-year government papers down 22 basis points this week, the biggest fall since March 2020. Futures were buoyant too, with the 10-year contract jumping 19 ticks to 98.5860.

New Zealand government bonds rose, sending yields about 5 basis points lower at the long-end of the curve while yields on 10-year government paper were at their lowest since end-April.

The moves were in line with US Treasuries where yields declined overnight after investors shrugged off higher-than-forecast inflation as insufficient to alter the Federal Reserve's easy monetary policy stance.

Surprisingly strong US inflation for April had rattled investors, prompting them to build huge short positions ahead of Thursday's May data, which were unwound overnight triggering stop losses.

Short positions in Treasuries were the highest since 2018, according to JP Morgan positioning data last week.

"For now the market has seemingly embraced the transitory inflation narrative, implying the Fed won't be taking its foot from the easing pedal anytime soon," said NAB analyst Rodrigo Catril.

Next week, all eyes will be on a speech by Reserve Bank of Australia (RBA) Governor Philip Lowe on Thursday ahead of the all-important July Board meeting, followed by labour market data which is pointing to strong employment growth for May.