Australian government bonds suffered their biggest weekly rout since 2001 as the Federal Reserve signaled it may begin tapering stimulus this year, reducing the appeal of the South Pacific nation’s assets.
The Aussie dollar was set for its biggest weekly drop versus the greenback since September 2011 after Fed Chairman Ben S. Bernanke said quantitative easing could end next year if economic improvement continues. Volatility in the currency jumped to the highest in 1 1/2 years as Chinese money-market rates surged to a record.
“It’s as if Bernanke has ratified this recent rise in bond yields,” said Tony Morriss, the head of interest-rate research at Australia & New Zealand Banking Group Ltd. in Sydney. “The market has moved relatively aggressively to price in unwinding of extraordinary policy support.”
The yield on Australia’s benchmark 10-year government bond closed up 12 basis points, or 0.12 percentage point, at 3.76 percent, the highest since April 23, 2012. Its 39-basis-point climb this week was the most since November 2001.
New Zealand’s 10-year government bond yield rose one basis point to 4.1 percent, the highest close since April 2012, following a 30 basis points surge yesterday, the most since October 2008. It gained 37 basis points this week, the biggest gain since March 2009.
The Fed may start dialing down its unprecedented bond-buying program this year and end it in mid-2014 if the economy finally achieves the sustainable growth policy makers have sought since the recession ended in 2009, Bernanke said June 19.
The U.S. central bank left the monthly pace of its bond purchases unchanged at $85 billion at the conclusion of a policy meeting that day, while saying that “downside risks to the outlook for the economy and the labor market” have diminished.
“Hopes that Fed chief Bernanke would attempt to assuage market concerns about tapering have been blown apart,” Mitul Kotecha, the global head of foreign-exchange strategy in Hong Kong at Credit Agricole SA, wrote in a research note. “Risk assets were just not ready for this revelation.”
Australia’s dollar has depreciated 11 percent over the past three months, the most among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. New Zealand’s dollar is the second-worst performer with a 5.6 percent slide.
The Aussie pared its weekly slide against the greenback to 3.6 percent as a technical indicator signaled recent declines may have been too fast. It rose 0.3 percent to 92.24 U.S. cents as of 5:31 p.m. in Sydney from yesterday, when it fell 1.1 percent to 91.97, the lowest close since September 2010.
The currency’s relative strength index versus the greenback slid to 29 yesterday, a level that some traders see as a sign that an asset’s price is poised to reverse course.
New Zealand’s kiwi dollar gained 0.2 percent to 77.71 U.S. cents after tumbling 1.8 percent yesterday, the most since April 15, to close at 77.57, the lowest since June 2012. The currency has fallen 3.5 percent this week, the biggest five-day decline since November 2011.
One-month implied volatility in the Aussie versus the greenback, based on currency options, declined 11 basis points to 14.84 percent, after touching 15.4 percent yesterday, the highest since December 2011.
“The volatility is definitely going to continue,” said Kieran Davies, chief economist at Barclays Plc in Sydney. “We’re at a point where you’ve got both offshore and onshore influences conspiring to push the Australian dollar lower.”
Growth in Australia and New Zealand is slowing along with China, their biggest trading partner. Economists polled by Bloomberg this month raised forecasts for the possibility of an Australian recession in the next 12 months to 10 percent, from 5 percent in May.
New Zealand’s economy grew a less-than-forecast 0.3 percent in the first quarter, slowing from a 1.5 percent expansion in the previous three months, government data showed yesterday. China’s manufacturing Purchasing Managers’ Index dropped more than estimated this month to 48.3, compared with 49.2 in May, HSBC Holdings Plc and Markit Economics said yesterday. Readings below 50 signal contraction.
The People’s Bank of China added 50 billion yuan ($8.2 billion) to the financial system yesterday after a cash squeeze drove money-market rates to record highs, according to Bank of Communications Co.
“China’s government is on a belated mission to curb the growth of the shadow banking system,” Sharon Zollner, a Wellington-based senior economist at ANZ, wrote in a note to clients. “These moves are not dissimilar to developments in U.S. markets leading up to the collapse of Lehman Brothers.”