Australia dollar pressured on heightened rate-cut chatter

[SYDNEY] The Australian and New Zealand dollars hovered near multi-year lows on Monday on heightened speculation the Reserve Bank of Australia will cut rates to record lows this week to spur economic growth.

The Australian dollar was hemmed in at US$0.7784, not far from a six-year trough of US$0.7720 set last week. Major support was found at US$0.7720-30, an area which was tested three times in as many sessions.

The Aussie remained vulnerable as speculators increased large short positions in the local currency, according to data from the Commodity Futures Trading Commission.

Not helping was a private gauge of Australian inflation at a two-and-a-half year low in January, pointing to scope for a cut in interest rates.

The central bank holds its first policy meeting of the year on Tuesday and markets are betting heavily that the cash rate will be cut.

Interbank futures imply a 62 per cent probability of a move to 2.25 per cent, from a one-in-five chance in mid-January, and are fully priced for a move by March. "The market is clearly banking on a rate cut, but this is far from guaranteed," said Stephen Innes, a senior trader at OANDA Asia Pacific.

Indeed, 20 out of 29 economists polled by Reuters forecast no move on Tuesday. "The tail risk for the RBA event is for no change which could see the Aussie gap higher as the market will probably be positioned short going into the announcement," Innes said.

Australian government bond futures climbed to record highs, with the three-year bond contract up 1 tick at 98.090. The 10-year contract added 3.5 ticks to 97.6350, while yields on cash bonds briefly touched a record low of 2.4 per cent, well under the RBA's cash rate.

The premium between Australian and US 2-year bond yields has shrunk to 149 basis points, the smallest since 2009.

Across the Tasman sea, the New Zealand dollar was nursing losses at US$0.7267, within sight of a near-four year low of US$0.7215 hit on Friday pressured by the Reserve Bank of New Zealand opening the door to a possible rate cut this year.

Support was put at US$0.7180 and resistance around US$0.7300.

This week's focus will include a dairy auction and a labour market report which is expected to see modest wage inflation and solid job growth.

New Zealand government bonds were trading with a bid tone sending yields 6.5 basis points lower along the curve.

REUTERS