Australia dollar near 6-week high after budget update, NZ$ rises

[SYDNEY] The Australian dollar rose on Monday to edge towards a six-week high after the country's government predicted its budget deficit would shrink faster than previously expected, while the New Zealand dollar hovered near a 2-month peak.

The Australian dollar was up 0.1 per cent at US$0.7650, within striking distance of Friday's high of US$0.7694 - a level not seen since early November.

In Monday's mid-year budget update, Treasurer Scott Morrison said the deficit for the year to June 2018 was now likely to be around A$23.6 billion (S$24.36 billion). That was down from A$29.4 billion predicted in the May budget and amounted to 1.3 per cent of Australia's annual gross domestic product (GDP).

The deficit was projected to shrink to A$20.5 billion in 2018/19 and A$2.6 billion the year after, before turning into a A$10.2 billion surplus in 2020/21.

The improved outlook means Australia's pristine AAA rating will remain intact as S&P Global Ratings, which has the country on negative watch, has sounded less concerned in recent months.

Aussie bulls also heaved a sigh of relief after the country's ruling coalition regained its wafer-thin parliamentary majority following a special poll over the weekend.

A loss would have plunged the government into a parliamentary minority, forcing it to rely on independent lawmakers to complete its agenda. It would also have placed Prime Minister Malcolm Turnbull's personal position in danger.

Further gains in the Aussie were capped by a stronger US dollar which was well bid amid expectations US lawmakers would pass a long-awaited tax bill this week.

Some investors expect the tax cuts to bolster US growth, prompting faster rate rises by the US Federal Reserve and leading to a stronger dollar.

The New Zealand dollar was last up 0.3 per cent at US$0.7013, just under recent two-month highs of US$0.7034, as investors awaited a slew of local economic data.

A fortnightly dairy auction is due in the wee hours of Wednesday and third quarter GDP figures on Thursday are expected to show the economy likely slowed.

"A further break higher is likely to be difficult with an expected mixed local data pulse this week and the passing of US tax reform, which should be USD positive in the short-term," said Con Williams, economist at ANZ Bank.

New Zealand government bonds eased, sending yields 2 basis points higher at the long end of the curve.

Australian government bond futures slipped, with the three-year bond contract down 3 ticks at 97.90. The 10-year contract fell 2.5 ticks to 97.420.

REUTERS