Australia, New Zealand dollars rally on chance of US-EU trade truce

[SYDNEY] The Australian and New Zealand dollars rallied on Thursday as an easing in trade tensions between the United States and European Union sparked a revival in risk appetite, at least until the next negative news headline came along.

The Aussie dollar had clambered up to US$0.7443, from a low of US$0.7392 on Wednesday, but met stiff resistance around 9S $0.7465. It also faces a daunting chart barrier at US$0.7484 which marks a double top from earlier in the month.

The New Zealand dollar was up at $0.6837, from Wednesday's trough of US$0.6786, but again faced stiff resistance in the US$0.6850/60 area.

The gains came after talks between President Donald Trump and European Commission President Jean-Claude Juncker led to an apparent ceasefire in trade hostilities.

In what the EU chief called a "major concession," Mr Trump agreed to refrain from imposing car tariffs while the two sides launch negotiations to cut other trade barriers.

"Their comments suggested the two trading blocs will be more jaw-jaw than war-war," wrote ANZ analysts in a note. "The US dollar weakened broadly as better sentiment helped emerging markets and commodity currencies overform."

The relatively open Australian economy is heavily reliant on free trade flows, especially of commodities, and would be highly vulnerable should a full-blown tariff war ensued.

Strong Chinese demand for commodities helped lift prices for Australia's exports by 1.9 percent in the second quarter, with liquefied natural gas performing strongly.

Thursday's data showed prices for imports rose by an even-higher 3.2 per cent, mainly due to oil, which likely caused a minor dip in the country's terms of trade for the quarter.

"The unexpected broad-based leap in hard and soft commodity export prices is encouraging for trade and economic growth," said Annette Beacher, chief Asia-Pacific macro strategist at TD Securities.

"The terms of trade is a medium-term driver of the exchange rate," she said. "Our fair value model for the Aussie is US$0.7520, with commodity prices currently providing the upside."

The general easing in risk aversion trimmed prices for New Zealand government bonds, sending yields 2 basis points higher towards the long end of the curve.

Australian three-year bond futures were half a tick firmer at 97.870, while the 10-year contract fell 1.5 ticks to 97.3050.

REUTERS