The Australian dollar dropped to one-week lows on Friday as investors avoided risky assets for the safety of bonds after dire US data raised the spectre of world recession while concerns about European banks mounted.
The dollar was down half a cent to $US1.0343 in late trade, after testing a session low of $US1.0316. That was a relatively modest loss given a general flight to safety sent regional stocks tumbling by more than 6 per cent, prompting rallies in spot gold and Treasury bonds.
The usual talk of diversification from Asian central banks helped the Aussie contain its losses. The local currency managed to hold above the 200-day MA of $1.0320, a level also associated with good buying interest, mostly related to option maturities.
"The (Antipodean) currencies are well bid by central banks and real money trying to get into the bond markets," Kerr said.
Australian government bonds were a big beneficiary, with 10-year yields diving to 4.24 per cent, its lowest since March 2009. That is a level way below the 4.75 per cent cash rate and an inversion that sometimes comes with fears of recession.
Financial markets also added to the chance of rate cuts from the Reserve Bank of Australia (RBA) given the gloom globally. Interbank futures imply a cut of 25 basis points at the next policy meeting in September and 114 basis points of easing by Christmas.
Currency investors, however, seem less inclined to wager on an easing.
"There is a dislocation with what the rate market is saying ... 160 basis points of cuts over the next year. If that was to be realised, the currency would not be at $US1.03," said Jarrod Kerr, interest rate strategist at Credit Suisse in Singapore.
Stops below $US1.0320 would open the way to $US1.0265, the 50 per cent retracement of the $US0.9927/$US1.0601 move. The Aussie has dropped 6 per cent this month.
The dollar also eased to a one-week trough against the safe-haven yen, with the Aussie at 79.10 yen, having lost more than 7 per cent this month.
Australian bond futures jumped, with the three-year contract climbing 0.11 points to 96.420 and the 10-year rising 0.145 points to 95.785.
Reuters