Australian, New Zealand dollar bulls take a breather on poor economic news

[SYDNEY] The Australian and New Zealand dollars backed away from multi-month highs on Thursday as some negative news at home provided speculators an excuse to take profits on recent generous gains.

The Aussie dollar edged down to US$0.7190, having touched an 18-month peak of US$0.7241 overnight. Immediate support comes in around US$0.7187 and US$0.7173.

The kiwi dollar held at US$0.6632, still short of its recent seven-month top of US$0.6716. Support lies at US$0.6590 and US$0.6575.

Aussie sentiment took a knock when Australian Prime Minister Scott Morrison told a news conference the new lockdowns in Victoria state would cut around A$10-12 billion from national gross domestic product in the third quarter, or about 2.5 percentage points from growth.

It will also take a chunk out of tax revenues and likely require yet more fiscal stimulus, lifting the government's already massive borrowing needs.

"We currently forecast a budget deficit for 2020/2021 of A$240 billion compared to the government's estimate of A$185 billion," said Westpac chief economist Bill Evans. "We also estimate a deficit in 2021/2022 of a further A$150 billion."

"I have never seen a more uncertain economic outlook than we currently face both domestically and globally," he added. "Risks remain to the downside with the failure to contain the virus more than offsetting any possible fiscal policy response."

The same goes for the State of Victoria, prompting S&P Global Ratings to put its 'AAA' long-term rating on negative credit watch with a chance of a downgrade in the next few months.

The Reserve Bank of Australia (RBA) will release updated forecasts for growth and inflation on Friday, though they may already have been overtaken by the latest lockdown.

This may be one reason the central bank has resumed its purchases of government debt, offering to buy another A$500 million of bonds on Thursday.

That has helped keep three-year yields down at 0.269 per cent, compared with a high of 0.299 per cent last week.

Yields on 10-year debt had edged up to 0.856 per cent, keeping them 32 basis points above US Treasury notes.

REUTERS