Australia dollar slumps to 2023 low amid flight to safety; kiwi follows

The Australian dollar was reeling at its new 2023 low on Thursday after the U.S. debt ceiling impasse triggered a new bout of flight to safety as the risk of default looms large, while the kiwi was also hit by a plunge in domestic yields.

The Aussie AUDUSD was licking its wounds at $0.6538 after plunging 1% overnight to as far as $0.6529, its lowest since November. It breached a key support level of $0.6564 and $0.6170 from October could be the next target.

The kiwi NZDUSD was teetering at $0.6093, having tumbled 2.2% overnight - its biggest daily fall since February. It dropped through its 200-day moving average of $0.6154 and is now eyeing its 2023 low of $0.6085.

It was particularly hit by a dovish Reserve Bank of New Zealand that shocked markets by signalling rate hikes are over, after raising rates to an 14-year high of 5.50%, sending local yields sharply lower. (NZDSM3NB2Y=)

Overnight, limited progress on raising the U.S. government's $31.4 trillion debt limit ahead of a June 1 deadline has made investors edgier as the risk of a catastrophic default looms larger.

Negotiators for President Joe Biden and top congressional Republican Kevin McCarthy on Wednesday held what the White House called productive talks.

Fitch Ratings put the United States' "AAA" ratings on negative watch on Wednesday, while Moody's might change its assessment of U.S. debt if lawmakers indicate a default is expected.

Federal Reserve minutes out on Wednesday showed the agreement among policy makers that the case for further interest-rate tightening had become "less certain". Futures have priced in an 100% chance that Fed would pause at the June meeting, compared with 70% a day ago, according to the CME Fed tool.

The recent slide in the Australian dollar has wrong-footed bulls in the market, with TD Securities suffering a potential loss of 2.37% on its long position, according to Mark McCormick, global head of FX and EM Strategy at TD Securities.

"The move reflects an abrupt shift in market dynamics, linking the complete collapse of China data surprises, the recovery in U.S. data, and the repricing of the Fed and global growth expectations," McCormick said in a note.

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