Australia dollar flies to 3-month peak as yield hunt heats up, kiwi follows

[SYDNEY] The Australian dollar climbed to a three-month peak on Wednesday, while its New Zealand counterpart also powered up as investors seeking to escape negative interest rates in Europe and Japan poured money into higher yielding assets.

The Australian dollar briefly popped above 77 US cents for the first time since early May and was trading at US$0.7696 at 0220 GMT. It has bounced nearly three cents since hitting a low in late July, despite falling domestic interest rates.

The Reserve Bank of Australia (RBA) cut rates to an all-time low of 1.50 per cent last week with markets fully priced for another easing by October.

Meanwhile, markets are awaiting RBA Governor Glenn Stevens at 0305 GMT to deliver what is likely to be his final speech before passing on the reins to Deputy Governor Philip Lowe in September.

Much of the recent Aussie strength comes as investors borrow at low rates in yen, pounds or euros to buy higher-yielding assets such as the Aussie and kiwi, a popular strategy known as the carry trade.

Carry trade demand typically picks up in the months of July to August, known for their low volatility due to the summer holidays in the northern hemisphere.

Investors clearly favour Australian and New Zealand 10-year government bonds , which fetch around 2 per cent compared with the negative rates of Japan and Germany and near zero returns of most European sovereign bonds.

The pound dropped to a three-year low of A$1.6863 , down 16 per cent so far this year, after the Bank of England flagged more quantitative easing should Britain's economic decline worsen.

The New Zealand dollar rose to US$0.7196 from US$0.7161 in morning trading, as investors awaited the Reserve Bank of New Zealand's (RBNZ) rates decision on Thursday.

The RBNZ is expected to cut rates by 25 basis points to 2.00 per cent, given persistently low inflation. Of 25 economists polled by Reuters, 24 expect a rate cut and only one said the central bank will remain on hold.

Cutting rates by 25 basis points alone would not be enough to stem the buoyant kiwi, according to analysts, saying the bank would have to make it clear it envisaged cutting further.

New Zealand government bonds gained, sending yields 6.5 basis points lower.

Australian government bond futures rose, with the three-year bond contract up 2 ticks at 98.620. The 10-year contract gained 4.5 ticks to 98.0900, while the 20-year contract was unchanged at 97.5465.

REUTERS