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Australia, NZ dollars friendless, RBA remarks awaited

Tuesday, May 24, 2016 - 09:28
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The Australian and New Zealand dollars drifted lower on Tuesday, as renewed weakness in commodity and equity markets sent investors to the safety of the yen.

[SYDNEY] The Australian and New Zealand dollars drifted lower on Tuesday, as renewed weakness in commodity and equity markets sent investors to the safety of the yen.

The Australian dollar eased to US$0.7211, from US$0.7224 early, pulling closer to its lowest level since March. Support was found at US$0.7175.

It has tumbled six US cents in one month, largely on speculation the US Federal Reserve will raise rates as early in June. In contrast, the Reserve Bank of Australia (RBA) is seen cutting rates to a record low of 1.5 per cent later this year.

All eyes are on RBA governor Glenn Stevens, who is due to address the Trans-Tasman Business Circle in Sydney at 0305 GMT in what will be his first public appearance since the May 3 interest rate cut.

"Markets will be looking for any further comments after the minutes last week suggested a lack of urgency on follow-up rate cuts," said Sean Callow, a senior strategist at Westpac.

Interbank futures are fully priced for another easing to a record low of 1.5 per cent later this year.

The Aussie was undermined by a 5.4 per cent drop in iron ore prices combined with a broadly stronger yen. The Aussie inched lower to 78.79 yen, having dropped 0.8 per cent on Monday. A break of the May 6 low of 78.14 yen could see a test of this year's trough of 77.57.

Likewise, the kiwi fell to 73.67 yen, having skidded nearly 1 per cent on Monday. Both Antipodean currencies have tumbled 8 yen each so far this year.

The New Zealand dollar was also on the back foot versus the greenback at US$0.6758. It failed to hold US$0.6800 overnight when Fed speakers again reiterated that June is live, said ANZ Bank senior FX strategist Sam Tuck who tips a short-term range of 0.6680 to 0.6820.

On the domestic calendar, investors will be watching for dairy giant Fonterra's opening forecast for how much it expects to pay its 10,500 farmer shareholders in the season that kicks off June 1. The government is due to present its budget on Thursday.

Local rates, meanwhile, continue to see upward pressure as conviction in further Reserve Bank of New Zealand easing evaporates. The OIS market no longer has a full 25 basis cut priced in, said BNZ currency strategist Jason Wong.

New Zealand government bonds eased, pushing yields 3 bps points higher at the short end and 2 bps higher at the long end.

Australian government bond futures had a soft tone, with the three-year bond contract off 1 tick at 98.380. The 10-year contract eased 2 ticks to 97.6950, while the 20-year contract was steady at 97.0650.

The diverging rate outlook between Australia and the United States kept the premium between Australian and US two-year cash bond yields near its lowest in 15 years at 75 basis points. It dropped to 74 basis points last week, from 130 basis points mid-April.

REUTERS