Australia, NZ dollars endure tough week, bonds get relief rally

SYDNEY: The Australian and New Zealand dollars were ending a turbulent week with stiff losses on Friday, while bonds enjoyed a much-needed relief rally after the Bank of England defied pressure for a rate hike.

The Aussie was huddled at $0.7384, having shed 1.8% on the week so far after repeatedly failing to clear the 200-day moving average at $0.7552. The pullback risked breaking support at $0.7380 for a move to at least $0.7325.

The kiwi dollar was off 1.1% for the week at $0.7093 , following a bearish breach of its 200-day moving average at $0.7100. The next support levels were down at $0.7040 and $0.6980.

Both had suffered collateral damage when the BOE on Thursday stunned markets by skipping a chance to raise interest rates.

That triggered a sharp unwinding of long sterling/short US dollar positions, which lifted the US currency across the board.

The Aussie had already been struggling with a dovish outlook from the Reserve Bank of Australia (RBA), which it underlined on Friday in a quarterly economic update.

While upgrading its growth and inflation forecasts, the central bank emphasised that progress on wage growth was still likely to be slow and it was prepared to be patient on rates.

"The market continues to adjust to the RBA's relatively dovish message, and there is likely to be a further shift in that direction given the global central bank messaging," said analysts at Westpac in a note.

"Daily technicals are rolling over too, suggesting we could see a dip towards the $0.7300/50 region."

Hard-hit debt markets were overjoyed by the BoE's reticence on rates and yields on Australian three-year bonds fell back to 0.91%, from a peak of 1.257% last week.

Ten-year yields eased to 1.78%, narrowing the spread over Treasuries to 25 basis points from a recent top of 51 basis points.

"We think the spread can narrow toward 15 bps over coming weeks," said Westpac.

Expectations for the cash rate have been pushed back, so futures are now fully priced for a hike to 0.25% by July, compared to May earlier in the week.