Australia, NZ dollars on defensive as risk rout sparks bond rally

SYDNEY: The Australian and New Zealand dollars were on the defensive on Friday as a rout in global share markets rattled risk assets, though bonds benefited from a flight to safety.

Concerns about the enormous capital needs of AI hammered technology stocks and sparked a rally in US Treasuries.

Massive spending on data centres has been a key driver of recent US growth, and investors worried that pace could slow.

Markets reacted by pricing out more than 20 basis points of Federal Reserve tightening, even as Brent oil topped $113 a barrel, threatening renewed inflation pressures.

Yields on Australian 10-year bonds dived 10 basis points to 5.164% in reaction, while 3-year futures jumped 9 ticks to 95.170.

The Antipodean currencies are often sold as proxies for risk, though in this case the main losses were against the safe-haven yen and Swiss franc with the greenback also taking a hit.

That left the Aussie flat at $0.7016, having eased just 0.1% overnight and it was still 1% higher for the week.

Resistance lies around $0.7040 with support at $0.6895. In contrast, it lost 0.9% on the yen overnight and fell 0.6% against the Swiss franc.

The kiwi dollar stood at $0.5683, having slipped 0.4% overnight and away from a one-month top of $0.5709.

Support comes in at the recent low of $0.5566.

The currency got a boost on Thursday when strong readings on core inflation at home reinforced expectations the Reserve Bank of New Zealand will hike rates next week.

Markets imply a 95% chance that rates will rise a quarter point to 3.0%, and see a peak of 3.75% next year.

Analysts at Citi changed their call from a “hold” to a “hike” for next week, citing elevated oil prices and a weak kiwi as some reasons for a tightening. “We expect guidance to echo September, leaving the door open to further hikes,” said Citi economist Josh Williamson.

“However, we see 3.00% as the peak given a fragile recovery, 5.6% unemployment, and slowing GDP, with binary upside risk from offshore tightening or unresolved Middle East tensions.”

Analysts at Westpac also shifted to a hike next week, though they see rates rising all the way to 4.0% by September next year.

“Forward guidance will likely leave open the option to raise rates further at the December meeting without presenting it as a sure thing,” said Kelly Eckhold, chief NZ economist at Westpac.

“We think a more measured tightening approach is appropriate from here as raising rates at every meeting until something ‘breaks’ could be a risky strategy if downside growth concerns crystallise.”