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Australian, New Zealand dollars suffer the world's woes, yields hit record lows

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The Australian and New Zealand dollars were heading for another week of losses on Friday as fears for the health of the global economy fuelled bets on aggressive rate cuts and drove local bond yields to all-time lows.

[SYDNEY] The Australian and New Zealand dollars were heading for another week of losses on Friday as fears for the health of the global economy fuelled bets on aggressive rate cuts and drove local bond yields to all-time lows.

The only saving grace for the Aussie was that markets reckoned the United States would ease even more drastically than Australia might, so restraining the US currency.

That saw the Aussie claw back a little of its losses to stand at US$0.6570, up from an 11-year trough of US$0.6542 hit on Wednesday. Yet it was still down 0.8 per cent for the week, having now fallen in eight of the last nine weeks.

The Aussie also took a beating on the euro, which jumped to seven-month peaks at A$1.6760 after the head of the European Central Bank played down the prospect of immediate easing there.

The kiwi dollar was also off 0.8 per cent for the week at US$0.6296, but at least up from a four-month low of US$0.6284.

Both currencies have been dumped as investors worried the spread of the coronavirus would do significant damage to the world economy, a major negative for countries that rely heavily on resource exports and tourism to support growth.

"Fragile industrial commodities and the China travel ban threaten each of Australia's top 5 exports - coal, iron ore, LNG, education, tourism - pointing to a collapse in the trade surplus starting in the January data," wrote analysts at Westpac.

"The RBA's growth optimism lends AUD some support with low risk of easing near term, but we still see two rate cuts this year."

It was just a couple of weeks ago that the Reserve Bank of Australia (RBA) was arguing the coronavirus would be a temporary jolt and the economy would still accelerate this year.

With those comments so recent, markets doubt the central bank would do a sudden u-turn and cut the 0.75 per cent cash rate at its next policy meeting on March 3.

Which is why futures imply only a 14 per cent chance of a quarter-point easing next week, though that rises to 50 per cent for April and 82 per cent by May. Investors are also pricing in a 50-50 chance of a second easing to 0.25 per cent by year end.

Yet that pricing is positively restrained compared to US rates, where the market now implies a 96 per cent chance the Federal Reserve will cut in March, compared to just 9 per cent a week ago.

It is also pricing in no less than three cuts for this year and the chance of at least one more in 2021.

Expectations of ever-cheaper money have sent bond prices soaring and taken yields on Australian 10-year bonds to an historic low at 0.838 per cent.

Three-year bond futures added another 1.5 ticks on Friday to 99.455, having touched a record peak of 99.495 overnight. The 10-year contract stood at 99.1400, after hitting a peak of 99.1850.

REUTERS