The Australian and New Zealand dollars were heading for a second week of sizeable gains on Friday as reports of a Sino-U.S. trade truce assuaged some concerns about the global economy, leading investors to trim wagers on more rate cuts.
The Australian dollar was trading at $0.6920 AUD=D3 having earlier climbed to a five-month high of $0.6939. That left it up 1.2% for the week and a long way from its recent low at $0.6755.
The kiwi dollar stood at $0.6616 NZD=D3 , after reaching another five-month high at $0.6636 before running into profit taking. It was up 0.8% for the week, and that was on top of a 2.2% surge the week before.
Sources told Reuters the White House had agreed to suspend some tariffs on Chinese goods and reduce others in return for Beijing's pledge to hike purchases of U.S. farm products in 2020, perhaps easing a major drag on world growth.
Investors had shorted the Aussie in part as a proxy against Chinese risks, and some of those positions were now being squeezed out. The deal could also provide much needed support to China's economy, and thus to demand for Australia's resource exports.
"We believe AUD/USD will struggle to appreciate much beyond $0.6900 in the short-term because we need to see a clear improvement in Australia's domestic economy," said Richard Grace, chief currency strategist at CBA.
The recent run of data at home has been disappointing with consumer spending showing scant sign of reviving despite a sharp upturn in home values.
"AUD has nevertheless endured a broad-based appreciation over the last two days, consistent with the improving global outlook," added Grace. "A brighter global economic outlook will provide solid support."
Indeed, the lessening in risk led investors to lengthen the odds on further rate cuts in both Australia and New Zealand.
Futures
0#YIB: now put the chance of the Reserve Bank of Australia (RBA) easing in February at 38%, down from over 50% at the start of the week.A quarter point cut to 0.5% was fully priced in by June, compared to April previously, while the probability of a move to 0.25% was scaled back to just 16%.
A February cut from the Reserve Bank of New Zealand (RBNZ) was considered as an 8% chance, and the market implied only 8 basis points of easing for all of 2020 RBNZWATCH .
Bonds duly took a beating and yields on Australian 10-year paper AU10YT=RR reached 1.24%, up from 1.00% just a couple of weeks ago. Three-year bond futures YTTc1 slid 9 ticks to 99.195, implying an yield of 0.805%.
Kiwi 10-year bond yields NZ10YT=RR rose to their highest since mid-July at 1.62%.
