Australia dollar dips on rate outlook, NZ dollar holds gains

[SYDNEY] The Australian dollar fell across the board on Thursday, while its New Zealand counterpart held steady on the changing rate outlook between the two countries.

The Australian dollar dipped to US$0.7334, from US$0.7374 early, pulling closer to a two-month trough of 73 US cents touched on Tuesday.

Selling picked up steam on the back of unwinding of Aussie long positions against the kiwi as markets lessen the chance of an interest rate cut by the Reserve Bank of New Zealand (RBNZ).

Overnight Index Swaps price a 76 per cent chance of a rate cut on June 9, from 90 per cent earlier in the week.

The Aussie slipped 0.5 per cent in the session to NZ$1.0750, and off a peak of NZ$1.0920 touched this week.

The Aussie has tumbled around five US cents in three weeks, largely after the Reserve Bank of Australia cut rates for the first time in a year and on expectations of more easing.

Interbank futures are fully priced for another cut this year and a small chance of a further move to 1.25 per cent.

The changing rate outlook between New Zealand and Australia sent the two-year bond spread to 43 basis points, from just two basis points in late April.

The New Zealand dollar held gains at US$0.6819, having bounced from US$0.6717 touched on Tuesday. The kiwi got a lift after the central bank failed to announce any specific measures to curb the hot housing market, potentially putting a lid on any further interest rate cuts.

The kiwi has gained some traction "as economists and traders alike question whether the RBNZ chief has the stomach to cut rates further given the extent of the housing concerns," said Stuart Ive, private client manager for OM Financial Ltd.

Mr Ive said the Kiwi faced resistance at US$0.6850-US$0.6890.

New Zealand government bonds gained, sending yields 3.5 basis points lower at the short end and five basis points lower at the long end.

Australian government bond futures had a firm tone, with the three-year bond contract up two ticks at 98.450. The 10-year contract edged up one tick to 97.7150, while the 20-year contract gained 2.5 ticks to 97.0950.

The diverging interest rate outlook between Australia and the United States kept the two-year bond spread near a decade low at 87 basis points.

REUTERS