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Australia, NZ dollars firm as calm encourages carry trade

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The Australian and New Zealand dollars held firm on Tuesday, having edged higher in the wake of soft US economic news and as low volatility globally encouraged leveraged plays in higher yielding assets.

[SYDNEY] The Australian and New Zealand dollars held firm on Tuesday, having edged higher in the wake of soft US economic news and as low volatility globally encouraged leveraged plays in higher yielding assets.

The Aussie stood at US$0.7596, after touching a top of US$0.7603 when a disappointing reading on US durable good orders hit its US counterpart.

The kiwi was consolidating at US$0.7293 and within striking distance of a recent four-month high peak at US$0.7320.

Both currencies have benefited from calm conditions in markets which tend to favour carry trades, borrowing at low rates in one currency to invest in another with higher returns.

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Implied volatilities for most major currencies have been in a downtrend since January, while Wall Street's main fear gauge for equities is at its lowest in a decade.

All this tranquillity means there is less risk of investors being stopped out of their leveraged positions by sudden, large moves in currencies.

The attraction of carry trade was clear against the yen, which pays a 10-year yield of five basis points compared to the 2.37 per cent offered by Australian bonds.

As a result, the Aussie was testing three-month peaks on the yen at 85.07 having climbed from as low as 81.69 early in June.

The kiwi was at its highest since February at 81.62 yen, having climbed almost 8 per cent since April.

"Global risk sentiment remains elevated, supporting the NZD and hurting the safe-haven yen," said Westpac currency analyst Imre Speizer.

"There is scope for the rise to be sustained towards the 82.50 area."

New Zealand government bonds gained, sending yields one basis point lower at the long end of the curve.

Australian government bond futures were little changed as debt markets globally awaited a speech from US Federal Reserve Chair Janet Yellen later on Tuesday.

The three-year bond contract was flat at 98.180, while the 10-year contract added 1.5 ticks to 97.5950.

REUTERS

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