Australia dollar holds ground as yield chase continues

[SYDNEY] The Australian dollar held its gains on Wednesday as yield-hungry investors continued to pour money into the currency despite a central bank easing the day before.

The Australian dollar stood at A$0.7592, having climbed nearly 1 per cent on Tuesday even as the Reserve Bank of Australia (RBA) cut rates to record lows.

Even with the latest cut, Australian rates look attractive compared to rich-world peers. Ten-year domestic debt yields are at 1.83 per cent compared to 1.53 per cent in the United States and -6 basis points in both Germany and Japan.

"The Aussie dollar is a clear winner in this chase-for-yield environment," said Stephen Innes, senior currency trader at Oanda Australia and Asia Pacific.

"The Aussie is enjoying Australia's AAA credit rating coupled with a 1.8 per cent 10-year coupon, which is attracting waves of foreign investor capital as global core interest rates continue to fall."

The Aussie's resilience has in turn led the market to price in a 50-50 chance of yet another cut by November. The currency is up more than 4 per cent so far this year, when the RBA has repeatedly warned that such strength was unwarranted.

Meanwhile, investors continued to shy away from the US dollar after last week's disappointing GDP data and indications from the Federal Reserve that interest rates won't go up in a hurry.

The New Zealand dollar slipped 0.5 per cent to US$0.7199 after subdued wage growth data added to pressure on the country's central bank to ease ruthlessly.

The Reserve Bank of New Zealand (RBNZ) has already flagged a rate cut as early as next week, saying its currency had to go lower to generate a much-needed rise in inflation.

"The RBA got the rate cut but not the currency weakness yesterday, so the RBNZ must be looking at the Aussie dollar reaction and thinking 'what do we have to do to rein in the currency'," said Ray Attrill, global co-head of forex strategy at National Australia Bank.

"Unless the RBNZ does more than 25 bps next week, it's hard to see the NZ dollar coming to any harm from a quarter point rate cut."

The kiwi dollar had risen as high as US$0.7257 overnight, boosted by recovering dairy prices. Whole milk prices had rallied 9.9 per cent in a closely watched auction, echoing strong dairy futures.

New Zealand government bonds eased, sending yields 3.5 basis points higher at the long end of the curve.

Australian government bond futures retreated in line with a sell-off in global debt. The three-year bond contract was off 6 ticks at 98.610, while the 10-year contract eased 11 ticks to 98.060.

REUTERS