Australia, NZ dollars subdued, set for strong monthly gains

[SYDNEY] The Australian and New Zealand dollars treaded water against the greenback in holiday-thinned trade on Monday, with both currencies headed for their best monthly gains since early 2016.

Liquidity in Asia was lighter than usual with financial markets in Hong Kong, China and Singapore shut for the Lunar New Year holiday.

The Australian dollar held at US$0.7551, not too far from its 2-1/2 month peak of US$0.7609 touched last week. It is already up nearly 5 per cent this month, on track for its best monthly performance since March 2016.

The currency has been swinging in a tight 75-76 US cent band, having struggled to stay above 76 cents after disappointing domestic inflation figures last week underlined the risk that interest rates were more likely to move down than up this year.

Also weighing on the Aussie was a rise in US yields, which propped up the greenback.

Some analysts expect the Australian dollar to weaken if inflation fails to hit the Reserve Bank of Australia's (RBA) target band and if the country's red-hot housing market slows down.

"The sentiment has shifted from a possible RBA rate hike bias to a greater chance of an interest rate cut," said Stephen Innes, senior trader at Oanda.

"If a slowdown in the Australian housing market unfolds as some expect, an RBA rate cut will be on the table in 2017. If this likelihood becomes a reality, look for the Aussie to move towards US$0.7000."

Later in the day, investors will watch for a speech by central bank deputy governor Guy Debelle for any hints on further monetary policy action. The RBA will meet for its next policy meeting on Feb 7.

Elsewhere, the Aussie slipped 0.2 per cent against both the yen and the euro as safehaven trades came back in vogue after US President Donald Trump's immigration curbs added to investor concerns about increasingly unpredictable US policies.

Investors have more broadly been frustrated by Mr Trump's lack of clarity on economic reforms and a focus on protectionism and immigration.

The New Zealand dollar stood at US$0.7273, coming off a 2-1/2 month high hit last week. It is up 4.9 per cent in January so far, on track for its best performance since June.

New Zealand government bonds rose, with yields down about five basis points across the curve.

Australian government bond futures gained, with the three-year bond contract up three ticks at 98.03. The 10-year contract climbed five ticks to 97.24.

REUTERS