Kiwi shines, Aussie slumbers

The New Zealand dollar rose to its highest in two weeks on Friday after the country's central bank warned about a resurgent housing boom, prompting the market to dial down expectations for a cut in interest rates next month. New Zealand government bond yields jumped, with the short-end rising as much as 5.5 basis points and flattening the yield curve.
The kiwi climbed as far as $0.7279, reaching a high last seen on June 24. It was last up 0.5 percent on the day at $0.7265 and on track to end the week more than 1 percent higher. The New Zealand currency firmed against the yen and euro and scaled a 15-month peak on its Australian peer, which slid towards NZ$1.0300. Speaking about housing risks late on Thursday, Reserve Bank of New Zealand (RBNZ) Deputy Governor Grant Spencer said the bank could introduce even tighter lending standards by year end to take the heat out of the market.
"The longer the boom continues, the more likely we will see a severe correction that could pose real risks to the financial system and broader economy," Spencer said. Cameron Bagrie, chief economist at ANZ, said he now expects the RBNZ to leave its official cash rate (OCR) unchanged next month. "You can't divorce that from monetary policy and throw more fuel on the fire by cutting the OCR. Macroprudential policy tweaks have been flagged, but not until much later on."
In contrast, the Aussie dollar was far more subdued. It kept a grip on 75 cents and looked to end the week flat. The Aussie was briefly unsettled on Thursday after Standard & Poor's unexpectedly downgraded its outlook on Australia's AAA rating to negative from stable. The ratings agency said Australia's knife-edge election was likely to put the new government in a weaker position to tackle the budget deficit.
Australian bonds barely reacted to the threat of a ratings downgrade. Compared with the negative yields on bonds from other developed countries such as Germany and Japan, Australian government bonds remain highly attractive to global investors. Australian government bond futures were a tad softer on Friday but within striking distance of record highs set earlier in the week. The three-year contract was three ticks lower on the day at 98.530, not far from an all-time high of 98.600. The 10-year contract eased 1.5 ticks to 98.1100.