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Australia, NZ dlrs drift off highs, hold solid weekly gains

Published 12/08/2016, 01:40 pm
Updated 12/08/2016, 01:50 pm
© Reuters.  Australia, NZ dlrs drift off highs, hold solid weekly gains
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By Cecile Lefort and Charlotte Greenfield

SYDNEY/WELLINGTON, Aug 12 (Reuters) - The Australian and New Zealand dollars drifted off recent highs on Friday after the market focused on the possibility of higher U.S. interest rates this year, but the two currencies were still poised for solid weekly gains.

That is a remarkable performance given New Zealand's central bank cut rates to record lows a week after Australia did the same.

The premium between Australian and U.S. government two-year bonds AU2YT=RR US2YT=RR shrank to 71 basis points, the thinnest since 2001, after a top U.S. Federal Reserve official flagged an increase in interest rates this year.

The comment helped the U.S. dollar recoup a little of its recent losses, sending the Australian dollar AUD=D4 to $0.7679, from a three-month peak of $0.7760 touched on Thursday. A break above $0.7760 would then aim for the year's high of $0.7836.

Yet the Aussie was on track to end the week 0.8 percent higher, despite falling interest rates at home. It has bounced two U.S. cents since the Reserve Bank of Australia (RBA) cut rates to a record low 1.5 percent last week.

Likewise, the feisty New Zealand dollar NZD=D4 has gained nearly 1 percent this week, even though the Reserve Bank of New Zealand (RBNZ) eased policy on Thursday, taking rates to a record low of 2.0 percent.

The Kiwi hovered around 72 cents, having soared to a 15-month peak of $0.7351 on Thursday.

Much of the Antipodeans' resilience comes from carry trades where investors borrow at low rates in yen, pounds or euros to buy higher-yielding assets such as equities, Aussie and Kiwi dollars.

Carry trade demand typically picks up in the months of July to August, which usually have low volatility due to the summer holidays in the northern hemisphere.

Investors clearly favour Australian and New Zealand 10-year government bonds AU10YT=RR NZ10YT=RR , which fetch around 2 percent compared with the negative rates of Japan and Germany and near zero returns of most European sovereign bonds.

But some dealers doubt the rally will last.

"We only need to see renewed strength for the greenback and NZDUSD could finally start to top out. Whichever way I look at it, Kiwi bulls have limited time," said Matt Simpson, senior market analyst at ThinkMarkets.

New Zealand government bonds 0#NZTSY= eased, sending yields 3 basis points higher.

Australian government bond futures fell, with the three-year bond contract YTTc1 off 2 ticks at 98.620.

The 10-year contract YTCc1 lost 5 ticks to 98.0850, while the 20-year contract YXXc1 shed 6.5 ticks to 97.5500. (Editing by Richard Borsuk)

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