Australia, NZ dollars on defensive as risk rout sparks bond rally

Sydney - The Australian and New Zealand dollars suffered a decline on Friday as a global sell-off of risk assets rattled markets, while bond prices soared due to investors seeking a safer investment. The plunge in share prices affected the two currencies, though their response differed. Technology stocks, impacted by the massive capital requirements of AI, plummeted, leading to a rally in US Treasuries.

This market reaction resulted in a reduction of more than 20 basis points of Federal Reserve tightening, even as oil prices reached over $113 a barrel, raising concerns of renewed inflation pressures.

Australian 10-year bond yields fell 10 basis points to 5.164%, while 3-year futures rose by 9 ticks to 95.170. The currencies are usually traded as risk proxies; however, in this instance, the main losses were against the safe-haven yen and Swiss franc, with the US dollar also experiencing a setback. The Australian dollar held steady at $0.7016, having only dipped 0.1% the previous night, and remained 1% higher over the past week.

Resistance is at $0.7040, while support is found at $0.6895. Conversely, the New Zealand dollar dropped 0.9% against the yen overnight and declined by 0.6% against the Swiss franc. The kiwi dollar closed at $0.5683, having slipped 0.4% yesterday and fell from a one-month high of $0.5709. Support is at the recent low of $0.5566. Analysts at Citi shifted their stance from a "hold" to a "hike" for the following week, citing factors such as high oil prices and a weak kiwi dollar as reasons for tightening monetary policy.

Citi economist Josh Williamson expects a peak of 3.75% next year, with a 95% probability of a quarter-point hike from the Reserve Bank of New Zealand. Westpac economists also anticipate a rate hike next week, projecting a potential peak of 4.0% by September next year.