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Australia, NZ dlrs worn down by risk of marathon easing cycle

By Wayne Cole

SYDNEY, July 26 (Reuters) – The Australian and New Zealand dollars nursed stinging weekly losses on Friday as markets wagered interest rates were not only heading lower but would stay down for years to come, driving bond yields in both countries to all-time lows.

The Aussie slipped to $0.6945, and looked set for a loss of 1.4% for the week. Support was found around $0.6940, with more at $0.6910.

The kiwi dollar was huddled at $0.6657, having shed 1.5% for the week. It was now threatening support under $0.6655, a break of which could see a retreat to chart targets at $0.6600 or even $0.6567.

Reserve Bank of Australia (RBA) Governor Philip Lowe on Thursday had underlined the bank’s easing bias by saying rates would stay low for longer given the Board was “strongly committed” to getting inflation back into the 2-3% target range.

Analysts suspected this would be a lengthy process given core inflation has been stuck below 2% for the past three years, which is why bond yields fell sharply at the long end of the curve to hit all-time lows.

Yields on 10-year bonds were down at 1.227%, having fallen a hefty 13 basis points (bps) for the week. The three-year bond future was almost 10 ticks higher for the week having hit a record peak of 99.205.

“We continue to forecast another cash rate cut around November and highlight that we suspect this will also ultimately be insufficient,” said Nomura economist Andrew Ticehurst.

“Moreover, if the governor is serious about trying to achieve the stated unemployment and inflation objectives, we see a material risk that the RBA will have to consider some form of QE next year.”

The futures market shows little chance of an easing at the next policy meeting in August, but shows an 88% chance of a move to 0.75% in October and a real prospect of reaching 0.5% by mid-2021.

The Reserve Bank of New Zealand (RBNZ) is also expected to cut its rates to 1.25% in August, and to 1% by February next year.

Yields on two-year paper were already at historic lows of 1.1% having dropped 6 bps this week.

Neither central bank is alone in providing stimulus, however. The European Central Bank on Thursday indicated it was likely to ease in September, and there is growing speculation the Bank of Japan will move soon.

Futures are fully priced for a cut of 25 bps from the Federal Reserve next week, with the chance of half a point put at 17%.

They are also priced for another easing in September or October and imply a total of 100 bps of cuts by late next year. (Editing by Kim Coghill)

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