AUD/USD and NZD/USD Fundamental Daily Forecast – Friday’s Rally Fueled by Quarterly Position-Squaring

The Australian and New Zealand Dollar finished higher on Friday as short investors booked profits ahead of the weekend while also performing some end of the quarter position-squaring. Both currencies finished the week sharply lower as the market gave up on the chance of early rate hikes and pulled bond yields sharply lower.

On Friday, the AUD/USD settled at .7641, up 0.0059 or +0.78% and the NZD/USD finished at .6999, up 0.0047 or +0.68%.

Lower Bond Yields Pressure Kiwi, Aussie All Week

In New Zealand, a huge rally in bonds saw yields on two-year paper down 9 basis points for the week at 0.26%, and back in line with the 0.25% cash rate. Ten-year yields were off 17 basis points for the week at 1.683%, having been as low as 1.545% at one stage.

Australian bonds followed with 10-year yields down 13 basis points on the week at 1.677%, a long way from the February top at 1.97%. Traders said a break under 1.65% could allow a further rally toward 1.42% and fill a chart gap left during February’s sudden selloff.

New Zealand Government Action Drives Yields Lower

Setting in motion last week’s plunge in the New Zealand and Australian Dollars was a move by New Zealand’s government aimed at property speculators and designed to tackle runaway house prices and prevent the formation of a ‘dangerous” bubble.

The government will remove tax incentives for investors to make speculation less lucrative and unlock more land to increase housing supply, Prime Minister Jacinda Ardern said Tuesday in Wellington. The moves come as surging house prices keep first-time buyers and people on lower incomes out of the market, raising concerns about growing societal inequality.

“The last thing home owners need right now is a dangerous housing bubble, but a number of indicators point towards that risk,” Ardern told a news conference. “Property investors are now the biggest share of buyers, with the highest amount of purchases on record. Last year, 15,000 people bought homes who already owned five or more.”

To dissuade speculation, the government will phase out the ability of investors to claim mortgage interest as a tax-deductible expense. It will extend the period in which profits on the sale of investment property are taxed to 10 years from five.

Finance Minister Grant Robertson said extending to 10 years the so-called “bright-line” test – effectively a capital gains tax on investment property sales – and removing interest deductibility for investors “will dampen speculative demand and tilt the balance towards first home buyers.”

For a look at all of today’s economic events, check out our economic calendar.