By Wayne Cole
SYDNEY, March 29 (Reuters) - The New Zealand dollar licked its wounds in Friday after a brutal week saw it shed over a cent in value as markets rushed to wager on coming interest rates cuts, driving bond yields in the country to historic lows.
The kiwi NZD=D3 was lying at $0.6782 having lost 1.4 percent for the week so far. Support was found at $0.6745 with resistance now far away at $0.6915.
Most of that decline came on Wednesday when the Reserve Bank of New Zealand blindsided investors by abandoning its neutral policy stance and declaring the next move in interest rates would likely be down.
Markets reacted violently by pricing in not one but two quarter-point easings in the 1.75 percent cash rate this year NZDOIS= 0#NBB: .
Yields on two-year notes NZ2YT=RR were down 14 basis points for the week, the largest such drop since mid-2016, and just off an all-time low of 1.395 percent.
That outsized response was exactly what the central bank wanted, RBNZ Governor Adrian Orr said on Friday. have shown they understand what we are focused on," Orr said after a speech in Wellington, suggesting he would be pleased to see the kiwi fall further.
"There's potential for these reactions to extend during the week ahead," said Imre Speizer, head of NZ market strategy at Westpac.
"Market pricing for the next RBNZ meeting in May is at a 50 percent chance of a cut, and has potential to run to 80 percent. That would push NZ yield spreads lower, and NZD/USD towards $0.6700."
NOW, THE RBA
The sudden swerve by the RBNZ also stoked speculation the Reserve Bank of Australia (RBA) would have to ease policy this year, if only to stop its currency from rising.
The market 0#YIB: has moved to price in a quarter-point rate cut to 1.25 percent as early as August. Yields on three-year paper AU3YT=RR sank to 1.41 percent, well under the cash rate.
That move dragged the Aussie off a peak of $0.7147 AUD=D3 , yet it was still a fraction firmer for the week at $0.7087 having found stubborn support around $0.7050.
The RBA holds its monthly policy meeting on April 2, just hours before the country's conservative government is due to release its annual budget.
The bank is considered almost certain to keep rates at 1.5 percent in part because the budget is expected to include generous tax cuts and spending promises as the government faces a tough election in May and is behind in the polls.
"The government will be tempted to find vote-winning measures ahead of the coming election, given receipts are growing more strongly than expected," said Cherelle Murphy, a senior economist at ANZ.
"The RBA is likely to welcome income tax cuts, preferring this stimulus over a lower cash rate, which would not address household's credit supply constraints."