Australian, New Zealand dollars track US equity strength as risk barometer

[SYDNEY] The Australian and New Zealand dollars held firm on Thursday as the risk-leveraged currencies maintained their recent close correlation to US equities, where tech stocks hit record highs overnight.

The Aussie stood at US$0.6975 having got as far as US$0.6995 earlier before again failing to clear the US$0.7000 chart barrier. Support comes in around US$0.6925/30.

The kiwi dollar steadied at US$0.6568 after touching US$0.6583, a whisker from the June peak of US$0.6585. A break there would take it to ground last trod in late January.

Both have been tracking US stocks as a barometer of global risk appetite, firming even as Australia has suffered a new outbreak of coronavirus that all but shut down its second largest city of Melbourne.

The lockdown is set to temper an expected rebound in economic activity this quarter, after what is likely to be a vicious contraction in the June quarter.

It will also eat into already strained tax revenues and likely prompt further fiscal stimulus, adding to debt. The government is due to release an update on the budget and new policy measures on July 23.

"With a spike of Covid-19 in Victoria seeing new mobility restrictions, there is now clear risk that stimulus is expanded more than we expect," said George Tharenou, an economist at UBS.

He now expects the federal government budget deficit to balloon to A$193 billion (S$187.5 billion) in the year to end June 2021, compared to his previous estimate of A$137 billion.

That would be up from an expected A$83 billion in the 2019/20 fiscal year.

Mr Tharenou also forecast government debt would climb to 80 per cent of gross domestic product (GDP) by June 2021, up from 52 per cent in 2018/19. Gross bond issuance would hit a record A$220 billion in 2020/21, with net sales of A$173 billion, he said.

So far, the market has been sanguine about the expansion of government debt with bond tenders drawing strong demand and yields remaining near historic lows.

Yields on 10-year bonds are at 0.90 per cent, having spent the past month in a 0.84 per cent to 0.977 per cent range.

Three-year yields have been steady around 0.26 per cent for weeks with the Reserve Bank of Australia (RBA) committed to keeping them near 0.25 per cent for some years to come.

REUTERS