Australian, New Zealand dollars hold weekly gains as markets front-run Federal Reserve

[SYDNEY] The Australian and New Zealand dollars held firm on Friday, clutching onto gains made as markets moved swiftly to price in a run of rate cuts in the United States as trade tensions escalated.

The Aussie dollar was steady at US$0.6975, sandwiched between support at US$0.6956 and resistance at US$0.7007.

It was up 0.5 per cent for the week so far, a resilient performance given the country's central bank cut interest rates to a record low on Tuesday.

The kiwi has fared even better at US$0.6614, bringing its gains for the week to 1.2 per cent.

It was underpinned in part by comments from Reserve Bank of New Zealand Assistant Governor Christian Hawkesby that rates were on hold for the foreseeable future, countering talk about another easing in the short term.

In contrast, the US dollar has been pressured by intense market speculation the Federal Reserve would have to cut its rates as insurance against a slowdown as President Donald Trump pursues trade disputes with both China and Mexico.

The futures market is wagering heavily on a cut as early as July, and has another two priced in by the middle of next year. That outlook could change again depending on what payrolls figures show later on Friday.

The shift in expectations has been rapid with yields on two-year Treasuries diving 29 basis points in just two weeks. In the same period, Australian yields have dipped just 4 basis points so shrinking the yield gap in favour of the Aussie.

A problem for the Aussie is that the Reserve Bank of Australia (RBA) is also thought likely to cut its 1.25 per cent cash rate again, possibly in July or August, and markets are increasingly wagering it may have to go under 1 per cent.

Futures have almost fully priced a move to 0.75 per cent by May next year following disappointing data on economic growth out this week.

"AUD has absorbed a lot of negative news over the past week, but it's domestic woes seem set to persist," said Sean Callow, a FX strategist at Westpac.

"The slide in US yields helps limit downside on AUD/USD but we still see probes of US$0.7000 failing, with a return to the US$0.68 handle not far away."

Australian government bond futures eased a touch on Friday but were still not far from all-time highs. The three-year bond contract dipped 2.5 ticks to 98.910, while the 10-year contract fell 2 ticks to 98.5000.

REUTERS