Australia, NZ dollars on defensive as spreads shrink
TLT•The Australian and New Zealand dollars fell 0.3% and 0.4%, respectively, as European debt jitters lifted the U.S. dollar. The premium on Australian debt over U.S. Treasuries narrowed to 8 basis points from about 40 in mid-September.
1. Currencies under pressure
The Australian dollar was at $0.6965 after falling 0.3% overnight, while the New Zealand dollar hovered at $0.5605 after losing 0.4%. Concerns about French deficits widened the spread between French and German 10-year bond yields to its largest since 2012, with pressure spreading to Italian and Greek bonds.
2. Australian yield spread narrows
Australian 10-year yields reached a 15-year high of 5.432%, but U.S. Treasury yields rose further, shrinking the premium on Australian debt to 8 basis points from around 40 in mid-September. CBA FX analyst Carol Kong said she believes the narrowing spread will take the Aussie to $0.6600 by early next year, citing less positive and eventually negative interest rate differentials.
