Australian, New Zealand dollars routed, bonds rally on growth scare

[SYDNEY] Australian and New Zealand dollars were in full retreat on Friday as risk aversion swept through global markets, while Sydney had to tighten its coronavirus lockdown as an outbreak of the Delta variant threatened to spiral out of control.

Worries about the economic outlook at home and abroad sent bond yields diving to their lowest since February, with a sharp flattening of yield curves signalling investors were suddenly more concerned about slower growth than faster inflation.

"There has not been a single catalyst triggering a turn in sentiment, instead it seems that an accumulation of events has culminated in a big U-turn towards cautiousness," said Rodrigo Catril, a senior FX strategist at NAB.

"The rapid spread of the Covid Delta variant has also raised concerns the global growth recovery could be derailed."

The Aussie skidded to US$0.7412, having shed 1.5 per cent for the week so far. It touched a seven-month trough of US$0.7410, after breaching major support at US$0.7445, opening the way to the next bear targets at US$0.7379 and US$0.7340.

The kiwi dollar sank to US$0.6925, to be down 1.2 per cent for the week. It matched the June low of US$0.6923 and a break would take it to levels not seen since last November.

"The longer the reassessment of a global recovery continues, the more these currencies will weaken," said Joseph Capurso, head of international economics at CBA.

"Our new forecasts predict weakness for the rest of the year," he warned. "We expect AUD to trough at US$0.7200 and NZD to trough at US$0.6650, but the risk is both currencies dip modestly below our guidance."

With the lockdown in Sydney set to be extended past its third week, the mounting damage to the economy is challenging market wagers that the Reserve Bank of Australia (RBA) would tighten early.

The RBA itself reiterated this week that no hike was likely until 2024, yet the market has been pricing in a move by late next year.

That timing was now being reconsidered with Australian 10-year bond yields down a steep 11 basis points on the week so far at 1.33 per cent, having hit their lowest since February.

They even outperformed Treasuries so that the spread over US debt narrowed to just two basis points, from 13 basis points at the start of the week.

The move in New Zealand was even sharper as 10-year yields dived 17 basis points on the week to 1.55 per cent, the lowest since March.

REUTERS