You are here
Australian, New Zealand dollars back from the brink, hope for calm spell
[SYDNEY] The Australian and New Zealand dollars were enjoying a relative calm spell on Wednesday after the Federal Reserve's promise to print unlimited amounts of US dollars eased liquidity constraints and boosted hard-hit risk assets.
The Aussie had settled at US$0.5967 for the moment having rallied 2 per cent on Tuesday, the biggest daily gain since mid-2015. The pause followed a madcap run that had seen the currency collapse 11 cents in just eight sessions to hit a 17-year trough at US$0.5510.
Resistance is now lined up at US$0.6000 with support at US$0.5940 and US$0.5890.
The kiwi dollar followed much the same path to stand at US$0.5823, having skidded as low as US$0.5469 just a few days ago. It faces resistance at US$0.5880, with support at US$0.5800 and US$0.5767.
The Fed's open-ended commitment to asset buying had helped meet a global rush for the liquidity of US dollars, easing pressure on commodity and emerging market currencies.
The central banks of Australia and New Zealand had also stepped up with programmes to buy government bonds aimed at keeping borrowing costs low and credit flowing.
The Reserve Bank of Australia (RBA) has so far bought A$13 billion of bonds in three operations, with the intention of keeping three-year yields down around the 0.25 per cent cash rate.
Yields were last at 0.32 per cent, having dived from 0.62 per cent before the RBA first announced its plans.
The central bank also offered to buy state government bonds, known as semis, on Wednesday.
Yields on semis have been nudging higher as the states committed to more fiscal stimulus spending, while tough rules on social distancing aimed at limiting the coronavirus were likely to eat into tax revenue.
The federal government will certainly need to borrow a lot more to fund its stimulus plans and ride out the shock wave from the pandemic.
"The Covid-19 shock to the Australian economy will trigger a deep recession and a sharp spike in the unemployment rate," said Westpac senior economist Andrew Hanlan. "The Federal budget position will deteriorate sharply over this year and next."
As a result, he expected the supply of government debt on issue would balloon by A$250 billion by mid-2021 to reach a total A$820 billion, or roughly 40 per cent of gross domestic product.
The market has, so far, seemed sanguine in the face of such heavy new issuance. Yields on 10-year bonds have steadied at 0.99 per cent after briefly spiking as high as 1.53 per cent last week when global markets became dysfunctional.
Yields on New Zealand debt were a little more elevated at 1.48 per cent but again off a peak of 1.80 per cent.