Global market volatility driven by concerns over AI spending has weighed on risk-sensitive currencies while boosting demand for bonds.

The Australian and New Zealand dollars came under pressure on Friday as a global share market sell-off unsettled investors and increased demand for safer assets. Concerns over the enormous capital requirements of artificial intelligence (AI) infrastructure weighed on technology stocks, while US Treasuries and Australian government bonds rallied.

The uncertainty also raised questions about the sustainability of data centre investment, which has been an important contributor to recent US economic growth. Meanwhile, Brent crude oil prices climbed above US$113 a barrel, adding to concerns about renewed inflationary pressure.
Australian Bond Yields Fall as Investors Seek Safety

Australian government bonds benefited from the shift towards safer assets. The yield on Australian 10-year bonds fell 10 basis points to 5.164%, while three-year bond futures rose nine ticks to 95.170.

The bond rally reflected changing market expectations as investors reassessed the outlook for economic growth and monetary policy. Markets also priced out more than 20 basis points of expected Federal Reserve tightening, despite rising oil prices creating fresh inflation risks.

This combination highlights the uncertainty facing financial markets as investors weigh the potential economic impact of AI investment spending against persistent inflation pressures.

Australian Dollar Holds Steady Despite Risk Aversion

The Australian dollar traded around 70.16 US cents, easing 0.1% overnight but remaining approximately 1% higher for the week. Its performance was mixed across major currencies, falling 0.9% against the Japanese yen and 0.6% against the Swiss franc as investors favoured traditional safe havens.

The currency faces resistance near 70.40 US cents, while support sits around 68.95 US cents.

The New Zealand dollar slipped 0.4% to 56.83 US cents, moving away from its recent one-month high of 57.09 US cents. Its weakness came despite stronger domestic core inflation readings that reinforced expectations of another interest rate increase by the Reserve Bank of New Zealand.

New Zealand Rate Hike Expectations Strengthen

Markets were pricing in a 95% probability of a 25-basis-point rate increase by the Reserve Bank of New Zealand at its next meeting, taking the policy rate to 3.0%.

Citi and Westpac analysts shifted towards expecting a rate hike, citing factors including elevated oil prices and a weak New Zealand dollar. However, their outlooks differed on the longer-term path, with Citi expecting rates to peak at 3.75% next year, while Westpac projected a potential rise to 4.0% by September 2027.

Both outlooks reflect the challenge of controlling inflation without placing excessive pressure on an economy facing fragile growth and elevated unemployment.

What Investors Should Watch Next

Investors will monitor global technology stocks, AI infrastructure spending, oil prices and central bank decisions for signals on bond yields and the direction of the Australian and New Zealand dollars.

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