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SYDNEY: The Australian and New Zealand dollars slumped against the yen on Friday after the Bank of Japan signalled that it would allow long-term interest rates to rise beyond its current cap, while local bonds extended a global sell-off.

The Aussie tumbled 1.3% to an eight week trough of 92.22 yen, bringing the decline in the past two sessions to a staggering 2.6%, the biggest since the last BOJ tweak in December.

The kiwi slid 1.0% to a seven-week low of 85.25 yen, having also dropped 1% overnight.

After much speculation, the BOJ on Friday maintained ultra-low interest rates but took steps to make its yield curve control policy more flexible, saying it would offer to buy 10-year Japanese government bonds (JGB) at 1.0% in fixed-rate operations, instead of the previous 0.5%.

The shift was flagged in a report in the Nikkei newspaper overnight and the yen initially fell in wild trade in the moments after the decision, before driving to its highest in a week at 138.61 per dollar.

Ten-year JGBs rose to a nine-year high of 0.575%. Australian 10-year yields jumped 16 basis points to 4.109% as investors fretted that one of the last sources of super-cheap liquidity might start drying up.

“We think there’s plenty of room for them (10-yr JGBs) to move even higher. We wouldn’t be surprised to see them hit 0.75 or 0.8, that to us means the dollar/yen has the potential to move lower,” said Rodrigo Catril, senior FX strategist at National Australia Bank.

Australia, NZ dollars draw support as global tightening nears an end

“The move up in the 10-year JGBs, which we suspect would continue, makes the appeal of overseas bonds for Japanese investors less appealing.”

The Aussie and kiwi are among the most liquid of the carry trades in which investors typically borrow yen at super-low rates to buy higher yielding currencies. With all the action in the yen, the Aussie was left 0.8% lower at $0.6654, having also slid 0.7% overnight in wild trades after hitting a session high of $0.6821.

The kiwi eased 0.5% to $0.6153, after easing 0.4% overnight.

The two currencies have been under pressure after data showed the US economy grew faster than expected in the second quarter.

That took off some optimism from the European Central Bank which raised the possibility of a pause in September after delivering its latest rate hike.

Australian retail sales fell 0.8% in June, the biggest fall this year, data showed on Friday, suggesting less need for another hike in domestic interest rates.

Futures now imply just a 20% chance that the RBA would surprise with a hike in August, while pricing in a peak rate of 4.3%.

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