Australia, NZ dollars drift off highs, hold solid weekly gains

[SYDNEY] The Australian and New Zealand dollars drifted off recent highs on Friday after the market focused on the possibility of higher US interest rates this year, but the two currencies were still poised for solid weekly gains.

That is a remarkable performance given New Zealand's central bank cut rates to record lows a week after Australia did the same.

The premium between Australian and US government two-year bonds shrank to 71 basis points, the thinnest since 2001, after a top US Federal Reserve official flagged an increase in interest rates this year.

The comment helped the US dollar recoup a little of its recent losses, sending the Australian dollar to US$0.7679, from a three-month peak of US$0.7760 touched on Thursday. A break above US$0.7760 would then aim for the year's high of US$0.7836.

Yet the Aussie was on track to end the week 0.8 per cent higher, despite falling interest rates at home. It has bounced two US cents since the Reserve Bank of Australia (RBA) cut rates to a record low 1.5 per cent last week.

Likewise, the feisty New Zealand dollar has gained nearly 1 per cent this week, even though the Reserve Bank of New Zealand (RBNZ) eased policy on Thursday, taking rates to a record low of 2.0 per cent.

The Kiwi hovered around 72 US cents, having soared to a 15-month peak of US$0.7351 on Thursday.

Much of the Antipodeans' resilience comes from carry trades where investors borrow at low rates in yen, pounds or euros to buy higher-yielding assets such as equities, Aussie and Kiwi dollars.

Carry trade demand typically picks up in the months of July to August, which usually have low volatility due to the summer holidays in the northern hemisphere.

Investors clearly favour Australian and New Zealand 10-year government bonds , which fetch around 2 per cent compared with the negative rates of Japan and Germany and near zero returns of most European sovereign bonds.

But some dealers doubt the rally will last.

"We only need to see renewed strength for the greenback and NZDUSD could finally start to top out. Whichever way I look at it, Kiwi bulls have limited time," said Matt Simpson, senior market analyst at ThinkMarkets.

New Zealand government bonds eased, sending yields 3 basis points higher.

Australian government bond futures fell, with the three-year bond contract off 2 ticks at 98.620.

The 10-year contract lost 5 ticks to 98.0850, while the 20-year contract shed 6.5 ticks to 97.5500.

AFP