By Wayne Cole
SYDNEY, Aug 5 (Reuters) – The Australian and New Zealand dollars were taking collateral damage on Monday, as investors shorted them as liquid proxies for a sliding Chinese yuan amid speculation Beijing could use its currency as a lever in the Sino-U.S. trade war.
The Aussie skidded to $0.6775 as the yuan broke through the psychological 7.0000 per dollar barrier in offshore trade. It touched a seven-month trough of $0.6763 on Friday. Support is seen around $0.6740 which was briefly hit during the flash crash of early January.
The kiwi was pinned at $0.6511, after carving out a seven-week low at $0.6506 on Friday. Support lies at prior lows from May and June in the $0.6482/90 area.
Both currencies have taken a spill on the safe-haven yen since the U.S. threatened new tariffs on China last week. The Aussie had cratered at 71.86 yen which, barring the flash crash, was the lowest since 2009.
The trade hostilities are likely to loom large when the Reserve Bank of Australia (RBA) holds its August policy meeting on Tuesday, though it is considered likely to hold rates at 1% after cutting in both June and July.
The pause is expected to be temporary with markets fully priced for a cut to 0.75% by November, and to 0.50% early next year.
RBA Governor Philip Lowe is also likely to repeat his recent line that rates will stay low for longer, a nod to forward guidance that has pushed down bond yields and the Aussie.
Yields on 10-year debt have dived 40 basis points in the past month alone to hit historic lows at 1.032%, while three-year yields reached 0.72%.
As well as the policy statement on Tuesday, Lowe has a chance to expand on the outlook in an appearance before lawmakers on Friday.
The Reserve Bank of New Zealand (RBNZ) holds its policy meeting on Wednesday and is considered certain to cut rates a quarter point to 1.25%, if only to stop the kiwi from rising as other central banks ease.
Markets are priced for a move to 1% by year end, and to 0.75% around the middle of 2020. Analysts assume the central bank will also adopt a more dovish outlook given growth risks at home and abroad, and lower its forecasts for rates in the future.
Back in May it had predicted rates would bottom at 1.4% by early next year, so there is plenty of scope to lower that path.
“From a technical perspective, the kiwi looks vulnerable to any indication that the RBNZ is prepared to go further,” said Hamish Wilkinson, a senior dealer at Kiwibank.
“With the kiwi sitting at some pretty key historical levels, should the RBNZ be brave in aggressively lowering its OCR track then they may really get some bang for their buck in lowering the dollar.”
He noted there was a four-year-old trendline just below $0.6500 and another major support bulwark at 69.40 yen right where the kiwi was trading at the moment.
The bond market is well ahead of the central bank having already taken two-year yields down to record lows of 0.98%, while the 10-year pays just 1.39%. (Editing by Jacqueline Wong)