Australia and New Zealand dlrs backtrack, bonds encircled by bets on US rates

SYDNEY, Jan.6 (Reuters) – The Australian and New Zealand dollars retreated as bonds were beaten on Thursday as markets reduced the chances of an early rise in US interest rates and a faster pace withdrawal of stimulus measures.

The Aussie faded to $ 0.7210, after leveling again at $ 0.7273 overnight. The currency has spent the past two weeks zigzagging between $ 0.7184 and $ 0.7276 and a sharp breakout of either could trigger a big move.

The Kiwi dollar fell to $ 0.6788, after falling to $ 0.6836 overnight. Major resistance is still looming at 0.6855 / $ 57 with support around $ 0.6766.

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Both lost ground after minutes from the last Federal Reserve meeting hinted they could hike rates as early as March, when analysts thought May or June were more likely start dates. Read more

Futures quickly moved to imply an almost 70% chance of a 0.25% hike at the March Fed meeting and rates of at least 0.75% by the end of the year.

This raised the yields of the Treasury and the US dollar, while hurting stocks and leveraged currencies.

“The FOMC minutes suggested not only a faster pace of rate hikes, but also an accelerated contraction of the Fed’s balance sheet,” RBC Capital Markets analysts noted.

“The combination of a reduction in equity risk as yields continue to rise would be attractive if it persists and should be broadly favorable to the US dollar.”

This has certainly put pressure on Australian bonds as 10-year yields jumped to 1.835%, from 1.55% a week ago and the highest since mid-November.

The Reserve Bank of Australia (RBA) has repeatedly insisted that a domestic rate hike is not likely until 2023, but markets suspect it may have to follow the Fed and go down to 0. 25% by June.

A positive sign globally was an optimistic reading of the Chinese economy of the Caixin Services Index which reached 53.1 in December. Read more

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Editing by Ana Nicolaci da Costa

Our standards: Thomson Reuters Trust Principles.

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