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Forex, News

Australia, NZ dollars pressured as yields keep falling

By Wayne Cole

SYDNEY, Aug 13 (Reuters) – The Australian and New Zealand dollars were fighting a rearguard action on Tuesday as investors shunned risk assets and bond markets flashed red on the risk of world recession.

The Aussie dollar was stuck at $0.6760 having shed 0.5% overnight as the global mood soured. It did find support around $0.6750, ahead of the recent decade-low at $0.6678, while resistance looked tough at $0.6822.

The kiwi dollar hovered at $0.6453 having failed at $0.6500, though it held above last week’s three-and-a-half-year trough of $0.6378.

Both currencies were pressured as disparate events, from protests in Hong Kong to a crash in Argentine markets, kept investors on edge and drove yields ever lower.

Yields on Australian 10-year bonds touched another historic low at 0.916%, taking them further under the overnight cash rate of 1%.

Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent noted that local yields had fallen further than in many peer nations and put downward pressure on the Aussie as intended.

The central bank has long hankered after a weaker currency to help support exports and services such as tourism. “At a two-year horizon, this interest rate differential has declined by about 100 basis points over the past year,” Kent told an economics event in Sydney.

“This lower return on Australian assets would no doubt have contributed to a decline in the value of the Australian dollar.”

Kent also said it was unlikely the RBA would need to resort to unconventional monetary policy, though it would be possible if ultimately needed.

Markets have already priced in two further quarter point rate cuts to 0.5%, and even the chance of a move to 0.25% by the middle of next year.

Three-year bond futures were up a shade at 99.355, implying an yield of just 0.645%.

A survey of businesses from National Australia Bank (NAB) underlined the fragile state of the domestic economy, with conditions and confidence both below average in July. “We expect a further easing in interest rates from the RBA and think that some greater fiscal support will be needed from the government to kickstart growth,” said NAB Group chief economist Alan Oster.

Investors are wagering the Reserve Bank of New Zealand (RBNZ) will have to go further, even though it surprised everyone last week but cutting rates by a steep 50 basis points to 1%.

Markets imply rates will reach 0.5% by late next year , while yields on two-year paper were near all-time lows at 0.80%. (Editing by Sam Holmes)

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