WELLINGTON/SYDNEY: The New Zealand and Australian dollars slipped on Friday to suffer their worst monthly performance in 2.5-years, with the kiwi knocked even harder after two of the major ratings agencies downgraded the country within a few hours Of eachother.
The battered kiwi was hovering near six-month lows at $0.7653, after Fitch's one-notch downgrade to AA. Standard and Poor's followed suit and both agencies cited growing foreign debt concerns for the cut.
"I'd give it a few more days yet, the kiwi may not have fully reacted to events today, so we might get more fallout next week," said Westpac senior strategist Imre Speizer.
"The outlook for the kiwi continues to look weak and we expect it to be around 71/72 US cents in the next month." .
He said $0.7650 was the first line of support with any breach opening the way to $0.7500, with $0.7800 set to cap the topside.
The kiwi is facing losses of a whopping 10.2 percent in September, its largest monthly drop since early 2009.
New Zealand's finance minister said the country was making progress in cutting its spending, heading back into surplus and reducing its borrowing, and was less vulnerable than it was three years ago.
"Investors are now reassessing their appetite for debt and credit ratings agencies are taking a tougher stance. When it comes to debt, the global market goalposts have changed," he said.
New Zealand debt prices tumbled, sending government bond yields as much as 11.5 basis points higher at the long end of the curve.
However, if the downgrades result in higher funding costs for New Zealand, the central bank may push out the start of its tightening cycle.
"The risks are certainly becoming even more skewed towards a later start than our March expectations," said Goldman Sachs economist Philip Borkin.
Financial market pricing of the Reserve Bank of NZ's rate outlook imply a 10 percent chance of a rate cut seen for next month's review and only 3 basis points of tightening over the next 12 months.
The downgrades boosted the Aussie to a three-week high against the kiwi at NZ$1.2767 before steadying at NZ$1.2747.
The kiwi gave ground on most cross rates, notably the yen against whom it was holding just above a six month low at 58.58 yen .
AUSTRALIAN DOLLAR
The Aussie was on course for the biggest monthly drop since the most volatile days of the global financial crisis in January 2009.
It was pinned at $0.9775 , having briefly touched a peak of $0.9879 overnight after Germany approved an expansion of the euro zone bailout fund. It is down 8.5 percent for the month, having struck a 10-month low of $0.9622 earlier this week.
Fears of a spiralling European debt crisis and a slowing global economy that would hit Asian exports caused investors to slash their bets on risky assets in the September quarter.
A stronger reading of last week's HSBC PMI for China which came in at 49.9, compared to the initial flash estimate of 49.4 failed to curb the downward trend for the Aussie.
The official PMI will be released on Saturday and bears had been wagering on a weak outcome.
A recent sell-off in Asian currencies has suggested some investors were bailing out of the "strong China" play, a move that has weighed on the local dollar, a proxy for Asian currencies.
While window-dressing by fund managers buying some of the quarter's outperforming assets to improve their books has helped support risk currencies this week, gains may be hard to get in the future as broader macro concerns still remain.
Support for the Aussie is seen at around $0.9700, then $0.9621, with resistance to be found at $0.9855-60, ahead of strong resistance at $0.9986.
Australian bond futures were steady though New Zealand's downgrade may prompt some investors to move their triple A rated funds elsewhere including Australia. The three-year contract was flat at 96.370 and the 10-year slightly up 0.025 points at 95.745.
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