Australia dollar firm in the face of RBA unease, NZ$ steady

[SYDNEY] The Australian dollar took a brief knock on Tuesday after the country's central bank cautioned that its strength could harm the economy, though the impact was quickly offset by gains in commodity prices and weakness in the US dollar.

Indeed, the Aussie was still 0.4 per cent higher on the day at US$0.8030, having recovered completely from a dip to US$0.8005. That left it within spitting distance of a two-year top of US$0.8066 touched last week.

The Reserve Bank of Australia (RBA) left interest rates at 1.5 per cent at its August policy meeting, as widely expected, but ratcheted up its disapproval against the higher currency.

The Aussie has climbed about 8 per cent in the past two months, threatening economic growth and employment.

"An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast," said RBA Governor Philip Lowe.

Previously, the central bank had merely said that a rising US dollar would complicate the economic outlook.

Yet the RBA has also played down any chance of a cut in interest rates to curb the dollar, in large part for fear of inflating a debt-driven bubble in the housing market.

Data out on Tuesday showed home prices surged in July as double-digit annual growth in Melbourne and Sydney belied efforts by regulators to tame the market.

Interbank futures now show almost no chance of a hike in rates for the remainder of this year, but also no prospect of an easing either.

The RBA is also fighting trends in global commodity prices, and notably iron ore - Australia's single biggest export earner. Dalian futures for the ore added 3.3 per cent on Tuesday, having climbed almost 8 per cent on Monday.

Commodities in general have been on a roll as the US dollar declined and improving economic news in China and Europe bolstered the outlook for global demand.

A Caixin/Markit survey out on Tuesday pointed to a pick up in China manufacturing, as output and new orders rose at the fastest pace since February on strong export sales.

The New Zealand dollar has also been faring well on its US cousin, hitting a two-year top last week. On Tuesday, the kiwi stood at US$0.7511, having found solid support in the US$0.7460/70 zone.

Investors next turn their attention to second-quarter employment data due out on Wednesday. Economists forecast jobs growth of around 0.7 per cent and a slight dip in unemployment to 4.8 per cent.

New Zealand government bonds eased, sending yields four basis points higher.

Australian government bond futures eased, with the three-year bond contract off three ticks at 98.020. The 10-year contract fell four ticks to 97.2750.

REUTERS