The Australian and New Zealand dollars were holding hefty gains for the week on Thursday as markets wagered a peak for the COVID-19 pandemic could be on the horizon, even as the death toll mounted across the globe.
The chance, no matter how slim, that economic lockdowns might start to be loosened soon was enough to lift equities and commodity prices, and boost growth-leveraged currencies.
That left the Aussie up at $0.6223 AUD=D3 , having climbed 3.8% for the week so far and well away from last month's 17-year trough at $0.5510. It also cleared major resistance at $0.6215, which could allow a run to the next target at $0.6326.
The kiwi has added almost 2.4% for the week to reach $0.6002 NZD=D3 , but still faces a tough chart barrier at $0.6067. Markets will be closed on Friday and Monday for holidays.
The Aussie quickly shrugged off S&P Global's decision to downgrade Australia's outlook to negative given it would be a year at least before the triple-A rating might be cut.
The move has had little apparent impact on demand for debt. The Australian government sold A$3 billion on notes on Thursday alone and the auctions all drew solid bids, as have all the enlarged bond sales this week.
Three-year yields AU3YT=RR were a shade higher for the week at 0.28%, but aggressive buying by the Reserve Bank of Australia (RBA) kept them in line with its target of 0.25%.
Yields on 10-year paper AU10YT=RR rose a sharper 20 basis points for the week to 0.97%, partly in line with a move in U.S. Treasuries and partly because the RBA had signalled it might slow bond purchases once markets had stabilised.
New Zealand is also planning to borrow a lot more, with bond issuance for 2019/20 almost doubling to NZ$25 billion and over half of that to be sold by the end of June.
Kimberley Mundy, an economist at CBA, estimates the government will have to raise NZ$90 billion by 2024 which would more than double debt to over 40% of GDP.
The central bank is helping keep the market liquid by offering to buy NZ$1.8 billion of bonds next week, on top of NZ$1.8 billion purchased this week.
Yet this is unlikely to appease the ratings agencies. "We expect the outlook on New Zealand's sovereign credit rating will be downgraded during the current recession," she said, but added such a change was likely to have only a fleeting impact on the kiwi much as it did on the Aussie.
In the long runs both currencies were driven by global economic growth and trends in the U.S. currency, and there the outlook was none too bright.
"As a result, we expect more NZD weakness in coming months irrespective of changes to the credit rating and/or outlook on the rating."
