Bonds Keep Rallying, Australian, and New Zealand Dollars Fall From Highs

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The Australian and New Zealand dollars retreated from recent highs on Friday following a steep drop in European bond yields, which boosted the US dollar and extended a powerful rally in the local bond markets.

The Australian dollar retreated to $0.7067 on Friday, down from its eight-month high of $0.7158 on Thursday. This drop follows a steep fall in European bond yields, primarily responsible for boosting the US dollar and sending local bonds into a powerful rally. Support levels for the Aussie come in at $0.7065 and $0.6984, while the following primary target for bulls is a $0.7283 high from June last year.

The New Zealand dollar also retreated on Friday, with the kiwi fading to $0.6470. This marks a drop from its eight-month peak of $0.6537, which it touched on Thursday. Moreover, support levels for the kiwi lie around $0.6450 and $0.6415, while significant resistance is found at $0.6576.

The retreat of the Australian and New Zealand dollars came as markets took a dovish view on rate guidance from the European Central Bank (ECB) and the Bank of England (BoE), which caused significant losses for the euro and pound while reversing a previous drop in the US dollar.

“We think the case to raise the cash rate by 40bp to a conventional metric of 3.50%, coupled with a stated intention to hold the policy rate steady over the period ahead, will be on the table,” said Aird.

“If the RBA raises the cash rate by 25bp, as per our central scenario, we do not think they will announce a stated intention to pause,” he added.

The huge rally in European bonds spilled over into local markets, with Australian three-year bond futures jumping 11 ticks to 96.960 at the close of trading on Friday. This marks a significant jump from the previous day’s close of 95.966 and is one of the biggest jumps seen in recent times.

Analysts believe this trend could continue into next week, given that global economic conditions remain uncertain and geopolitical tensions are mounting between significant economies such as the US and China.

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