By Wayne Cole
SYDNEY, July 30 (Reuters) – The Australian and New Zealand dollars were on the defensive on Tuesday as markets wagered on ever-more aggressive rate cuts at home, a day before the Federal Reserve was widely expected to start its easing cycle.
The Aussie dollar was struggling to stay afloat at $0.6900, after touching a five-week low at $0.6895. A sustained break under $0.6900 support would risk a re-test of the June trough at $0.6832.
The kiwi dollar was pinned at $0.6627, having hit a three-week low at $0.6616 overnight. Major support lies at $0.6567.
Australian data on building approvals proved soft but had little impact ahead of key inflation figures on Wednesday, which are expected to show a general lack of price pressures.
Core inflation is seen remaining well below the Reserve Bank of Australia’s (RBA) 2-3% target band, underlining why the central bank cut interest rates in both June and July and why it might move again.
Long-term bond yields have been sliding since RBA Governor Philip Lowe last week emphasised rates would be low for longer, a rhetorical shift investors took as a step toward explicit forward guidance.
“We see it as a tool designed to flatten the yield curve and put downward pressure on the AUD. It worked,” said ANZ’s head of Australian economics David Plank.
Yields on 10-year notes hit an historic trough at 1.176% on Monday, having dived 20 basis points in little more than a week.
That left Australian yields 85 basis points below those in the United States, easily the widest gap on record and a drop of 50 basis points on a year ago.
“We see the 10-year spread reaching -100 basis points later this year,” said Plank. “This outperformance is exactly what the RBA has desired as it also pushes the AUD lower, or at least lessens the upward pressure that flows from a dovish Fed and ECB.”
Indeed, with so many central banks easing, analysts suspect the RBA will have to cut cash rates further to prevent an unwelcome appreciation in the Aussie.
Futures are almost fully priced for a quarter-point reduction in October to 0.75% and another to 0.5% by mid-2020.
The market expects the Reserve Bank of New Zealand (RBNZ) will cut its cash rate to 1.25% at a policy meeting on Aug. 7, and to 1% by February next year.
Yields on New Zealand 10-year bonds were down at all-time lows of 1.51% having fallen 17 basis points in the past two weeks.
The Aussie dollar did fare better on the British pound which took a beating as investors fretted on the risks the UK could leave the European Union with no exit deal in place.
Sterling was huddled at A$1.7706, having shed 1.2% overnight in its biggest daily loss since November 2018. (Editing by Shri Navaratnam)