Australian, New Zealand dollars crash and burn as Delta variant takes off

[SYDNEY] The Australian and New Zealand dollars cratered at 10-month lows on Friday as coronavirus lockdowns undermined their economies and pushed out policy tightening, sparking a steep drop in bond yields.

The Aussie dollar lay in tatters at US$0.7138 having dived an eye-watering 3.2 per cent for the week so far, the largest fall in almost a year.

A break of the 200-week moving average at US$0.7223 had turned the technical outlook deeply bearish and opened the way to the next target at US$0.6990, a trough from November last year.

The kiwi dollar had shed 3.1 per cent on the week so far to US$0.6820, again the biggest drop since September last year. The next target is the 200-week average at US$0.6760 and then US$0.6590.

Both currencies have been upended by the spread of the Delta variant at home, with Sydney extending a strict lockdown out to the end of September while New Zealand lengthened its national lockdown to next week.

The latter forced the Reserve Bank of New Zealand to delay a rate hike this week and markets are now pricing only a one-in-three chance of a move at its October meeting.

The Reserve Bank of Australia (RBA) was still planning on tapering its bond buying in September but the lockdowns and a disappointingly weak reading on wages argue for a dovish stance.

"The efforts to combat Delta will push GDP down more than 3 per cent q/q in Q3," warned David Plank, ANZ's head of Australian economics. "For the year to December, growth is now expected to be 1.4 per cent, down from our previous forecast of 3.8 per cent."

"Whether the taper in weekly bond purchases is delayed in September is still up in the air, but we've pushed our forecast for the first rate hike into the first half of 2024."

That outlook has driven a blistering rally in bonds.

Yields on 10-year paper were down a hefty 14 basis points on the week at a seven-month low of 1.075 per cent. That took them 17 basis points below US yields and offered another reason to short the Aussie.

New Zealand 10-year yields were down 16 basis points for the week at 1.59 per cent.

All this comes as the Federal Reserve moves closer to starting its taper later this year, giving the US dollar a lift of its own.

The global spread of the Delta variant combined with concerns about a slowdown in China have also taken the heat out of commodities.

Iron ore, Australia's single biggest export earner, has fallen by a third since peaking in mid-May and could see the RBA's index of commodity prices dive 10 per cent in August.

REUTERS