Risk rout hits Aussie, kiwi as bonds rally

A sharp global share-market sell-off put the Australian and New Zealand dollars on the defensive on Friday, as investors reduced exposure to risk-sensitive assets and moved into safer havens. Massive spending on data centres has been a key driver of recent US growth, and investors grew more cautious about whether the current pace of AI-related investment can sustain profits. The shift in risk appetite supported government bonds and safe-haven currencies while weighing on higher-yielding assets linked to global growth.

The Australian dollar (AUDUSD) was little changed against the US dollar, trading around $0.7016 after easing 0.1% overnight, but it came under greater pressure against currencies that tend to benefit when markets turn defensive. The Australian and New Zealand dollars weakened against the Japanese yen and Swiss franc, with the Australian dollar falling 0.9% versus the yen and 0.6% versus the franc. These moves reflected a broader unwinding of carry trades that had previously favoured higher-yielding currencies such as the Aussie and kiwi.

Government bonds drew strong demand as investors sought safety, driving yields lower. Australian 10-year bond yields fell 10 basis points to 5.164%, while three-year bond futures rose, indicating expectations of lower or steadier policy rates ahead. US Treasuries also rallied, and futures markets priced out more than 20 basis points of expected Federal Reserve tightening, even as Brent crude (UKOUSD) oil traded above $113 a barrel and continued to pose upside risks to inflation.

The risk-off move underscored how quickly expectations for central bank policy can adjust when sentiment toward growth sectors shifts. Concerns that heavy capital expenditure on AI-related infrastructure may not translate into commensurate earnings led investors to trim equity positions, particularly in technology, and re-evaluate the trajectory of US monetary policy. The resulting decline in bond yields helped offset some pressure from higher energy prices but reinforced demand for traditionally safer currencies.

Despite the broader risk aversion, rate expectations in New Zealand remained firm and continued to offer some support to the kiwi. Markets are assigning a 95% probability that the Reserve Bank of New Zealand will raise its policy rate by a quarter point to 3.0% at its meeting next week. Current market pricing suggests a peak policy rate of 3.75% next year, reflecting expectations that further tightening may be needed beyond the upcoming move.

Analysts differ on where New Zealand interest rates will ultimately top out. Some see 3.0% as the peak, citing a fragile economic recovery, an unemployment rate of 5.6%, and slowing GDP growth, while flagging potential upside risks from tighter global financial conditions or ongoing geopolitical tensions. Others expect the policy rate to reach 4.0% by September next year, and they anticipate that forward guidance will leave open the option of additional increases at future meetings without committing to them. These varying projections highlight the uncertainty surrounding the balance between containing inflation and supporting growth in a more volatile global environment.