Australia dollar feels China pinch, New Zealand dollar holds ground

[SYDNEY] The Australian dollar drifted lower on Wednesday following a downgrade in China's sovereign ratings and a weak domestic construction report, while its New Zealand counterpart held its ground after solid data at home.

The Australian dollar eased to US$0.7460, away from a three-week peak of US$0.7517 set on Tuesday. It briefly dipped to US$0.7455 after Moody's cut China's ratings to A1, from Aa3, citing rising debt amid a slowing economy. China is a key export market for Australia.

"The Aussie reaction is not necessarily a direct economic response, it's more a sentiment response," said Annette Beacher, chief macro strategist, FX and rates at TD Securities, adding that anything bad for China is seen as bad for Australia.

Also undermining the Aussie was a 0.7 per cent fall in domestic construction work done in the first quarter versus forecasts of a 0.2 per cent decrease.

The slippage follows a surprisingly hefty 13.4 per cent drop in building approvals in March.

Support for the Aussie was seen at around US$0.7449.

Across the Tasman Sea, the New Zealand dollar held its ground after solid domestic data. It was steady at US$0.7014, not far from a one-month high of US$0.7050 the previous day.

New Zealand posted a trade surplus of NZ$578 million (S$563.1 million) in April, the largest monthly figure since 2015 thanks to dairy, wood and wine exports.

Also supporting the kiwi was news that Fonterra Co-Operative Group Ltd had lifted its forecast milk payout for the 2016-17 season.

Investors awaited the release of the national budget on Thursday, which is set to show a stronger-than-expected surplus. "Resistance at US$0.7050 proved too hard to break. Expectations of more positive export earning results this morning and a rosy government budget tomorrow suggests this could be tested again before the end of the week," said Con Williams, ANZ economist, in a research note.

New Zealand government bonds eased, sending yields three basis points higher at the long end of the curve.

Australian government bond futures were soft, with the three-year bond contract off 2 ticks at 98.240. The 10-year contract eased 4.5 ticks to 97.4800, while the 20-year contract was steady at 96.9005.

The spread between Australian and US two-year government bonds shrunk to 31 basis points, its smallest level since 2001.

REUTERS