Australia, NZ dollars brace for Fed word on rate outlook

[SYDNEY] The Australian dollar edged lower on Tuesday after a survey on domestic business conditions disappointed, while its New Zealand cousin remained on the defensive ahead of an expected hike in US interest rates this week.

Economic data out of China was too mixed to provide much direction, with investment outpacing forecasts even as retail sales undershot.

The Australian dollar was off 0.1 per cent at US$0.7558 in lacklustre trade, but avoided another test of the recent seven-week low of US$0.7491.

The currency took a dip after a local measure of business conditions fell from decade highs in February as sales unwound some surprisingly strong gains the month before, though activity remained above average across most sectors.

National Australia Bank's monthly index of business conditions dropped 7 points to +9 in February, but stayed above the long-run average of +5.

The survey was solid enough to suggest there was scant risk of a cut in interest rates ahead, with the Reserve Bank of Australia (RBA) more concerned about cooling a debt-fuelled spike in home prices.

The head of the central bank's financial division on Tuesday hinted regulators were looking at further toughening rules on bank lending for property investment to head off risks in the market.

The New Zealand dollar was holding steady at US$0.6918, after failing to break above resistance around US$0.6950 overnight. Support lies at the recent two-month trough of US$0.6890, and a break there would set up a test of the December low at US$0.6863.

Investors globally are awaiting the Federal Reserve's policy decision on Wednesday where a rate rise is considered a done deal. More important will be what policymakers signal about the prospect of further hikes.

Any suggestion that the Fed might tighten more than three times in total this year would tend to push up Treasury yields and the US dollar.

Yields on Australian 10-year government debt eased a touch to 2.95 per cent after hitting the highest since late 2015 last week at 2.988 per cent.

Australian government bond futures edged up, with the 10-year contract 2.5 ticks firmer at 97.0350. The three-year bond contract was flat at 97.850.

New Zealand government bonds were little changed.

REUTERS