SYDNEY, July 24(Reuters) - The Australian and New Zealand dollars stepped back from recent multi-month highs on Friday as deteriorating Sino-U.S. relations soured investor appetite for risk.
The Aussie was last at $0.7105, easing from a 16-month peak of $0.7184 touched earlier in the week. It has climbed 1.5% so far this week.
The kiwi dollar stood at $0.6636 after rising as high as $0.6690 on Thursday, levels not seen since January. Its major hurdle is a $0.6755 high from December of last year.
The rally in the antipodean currencies came to a stop as Sino-U.S. tensions flared up again.
China has said it “must” retaliate after the U.S. ordered its Houston consulate to shut this week amid spying allegations. The editor of China’s Global Times said on Twitter that Beijing will announce countermeasures on Friday and ask one U.S. consulate to close.
News about some progress in the development of a potential COVID-19 vaccine, combined with data suggesting that policy stimulus globally was having the desired effect, have boosted risk appetite in recent weeks.
However, tensions between the world’s two largest economies and the fact that coronavirus infections are still not under control is weighing on sentiment.
“If the U.S.-China tensions continue to escalate and the virus continues to spread fast, investors may eventually decide to abandon equities and other risky assets, on fears of a fresh economic downturn,” said Charalambos Pissouros, senior market analyst at JFD Group.
NAB strategist Ray Attrill sees the Aussie hitting $0.72 by year-end, “consistent with an ongoing, infrastructure-heavy China economic recovery and related commodity price strength, and a softer USD.”
“The key risk to this view is anything that prompts a significant correction in risk sentiment,” said Attrill.
“Internationally we would list the approaching U.S. election as (being) high on the list.”
Australian government bond futures were little changed with the 10-year contract up half a tick at 99.125, implying an yield of 0.875%.
A regular tender for A$3 billion in Treasury notes on Thursday drew bids worth A$18.2 billion. A new 2051 bond line will be sold by syndication next week and is expected to be well received. (Editing by Ana Nicolaci da Costa)