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Australia, NZ dollars swing higher; RBA in spotlight

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The Australian and New Zealand dollars gained on Tuesday in holiday-thinned markets as traders waited anxiously to see if the Reserve Bank of Australia (RBA) will cut interest rates for the first time in a year.

[SYDNEY] The Australian and New Zealand dollars gained on Tuesday in holiday-thinned markets as traders waited anxiously to see if the Reserve Bank of Australia (RBA) will cut interest rates for the first time in a year.

The Australian dollar rose to US$0.7701, from US$0.7667 early, having recovered from a low of US$0.7548 touched last week. Immediate resistance was found around US$0.7715.

The Aussie also stood tall against the yen at 81.76 yen from a two-month trough of 80.60 yen. It bounced back to C$0.9620 versus its Canadian counterpart, away from a 2016 low of C$0.9517 touched in the last two sessions.

Helping was upbeat building approvals data showing a gain of 3.7 per cent in March, against forecasts of a fall of 3 per cent.

The Reserve Bank of Australia (RBA) announces the outcome of its May policy meeting at 0430 GMT and while the majority of economists polled by Reuters expect no easing, it is a much closer call for financial markets.

Interbank futures imply around a 50-50 chance of an easing to a record low of 1.75 per cent, largely due to surprisingly low inflation.

Dealers said heavy positioning in the Aussie makes it highly sensitive to the RBA decision, with some forecasting a gain or loss of 2 per cent depending on the outcome.

"Leveraged funds are now long AUD to the tune of US$4.6 billion, the most since September 2014," noted ANZ in a note.

A lack of liquidity could exacerbate any move with Japanese markets closed until Thursday for Golden Week.

The New Zealand dollar edged up for the fourth consecutive session, rising to US$0.7047 from $0.7024.

The kiwi currency was at risk of falling if the RBA cuts rates as it would likely reinforce expectations the Reserve Bank of New Zealand (RBNZ) would follow suit with an easing in June.

The Aussie bounced to NZ$1.0921, away from a two-month low of NZ$1.0837 touched on Monday.

The results of a global dairy auction due out on Wednesday could also move the Kiwi.

"We are hopeful that the auction may continue the recent theme of modest improvement," said BNZ senior market strategist Kymberly Martin, in a research note.

Labour data was also due out on Wednesday with analysts expecting a rise in the unemployment rate.

New Zealand government bonds eased, sending yields 2 basis points higher at the long end of the curve.

Australian government bond futures dipped, with the three-year bond contract off 3 ticks at 98.100. The 10-year contract shed 4 ticks to 97.4400, while the 20-year contract lost 1.5 ticks to 96.8550.

REUTERS