Australian, New Zealand dollars ease from highs, bonds rally

[SYDNEY] The Australian and New Zealand dollars weakened from recent highs on Thursday and bonds rallied as investors wagered domestic interest rates would stay low after the US Federal Reserve pledged to stay near zero through at least 2022.

The Australian dollar, a liquid proxy for risk, was last off 0.2 per cent at US$0.6982, easing from a high of US$0.7069 touched overnight.

The New Zealand dollar was down 0.2 per cent at US$0.6523 afetr going as high as US$0.6585 overnight.

The falls came as bond prices jumped after the Fed repeated its promise of continued extraordinary support for the US economy and maintained the size of its bond purchase programme.

Despite the drop, the Aussie is still near July 2019 highs when the cash rate was 1 per cent versus the current 0.25 per cent, due to a lengthy rally that began since early May. It's kiwi cousin is near four-month highs.

Both countries have proven relatively successful in containing the coronavirus with New Zealand having essentially stopped all fresh infections, allowing the entire economy to re-emerge from the lockdown. Even professional rugby games will return on the weekend with stadiums packed full of fans.

Also supporting the Aussie, commodity prices - notably oil, iron ore and gold, have been buoyant.

"In early May we were struggling to justify the full extent of the AUD/USD rally ... we are now much less troubled by the AUD's strong performance," forex strategists at National Australia Bank wrote in a note.

"Levels above US$0.70 do though currently look quite rich, leading us to expect a period of consolidation near term if not outright slippage back into the mid-high 0.60s."

NAB is predicting the Aussie to jump to US$0.72 by year-end and US$0.75 by the finish of next year.

New Zealand government bonds rose, with long-term yields down about 7-8 basis points.

Australian government bond futures jumped, with the three-year bond contract rising 1 tick to 99.725. The 10-year contract surging 8.5 ticks to 99.08.

REUTERS