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Australia, NZ dollars edge up on downswing in tension over North Korea

[SYDNEY] The Australian and New Zealand dollars clawed back some lost ground on Tuesday as tensions over North Korea seemed to lessen somewhat, leading to a rebound in risk assets across Asia.

The Aussie dollar edged up to US$0.7870, after finding support around US$0.7850 overnight.

It had stretched as high as US$0.7920 on Monday before the US dollar got a boost from hawkish comments by a top Federal Reserve official.

Dealers said the Aussie was hampered by market positioning. Figures from the Commodity Futures Trading Commission show speculative long bets in the Aussie expanded to their largest since early 2013, leaving it vulnerable to a pullback.

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The Aussie did win a reprieve when North Korea's leader signalled that he would delay plans to fire a missile near Guam, unwinding some recent risk aversion.

At home, minutes of the Reserve Bank of Australia's (RBA) August policy meeting underlined the bank's generally upbeat view of the economy, predicting growth would run around 3 per cent for 2018 and 2019.

The central bank did again note that a further rise in the Aussie would drag on growth, but stopped short of calling for a lower currency. None of which changed market bets for steady interest rates this year.

"We see policy on hold until deep into 2018," said Gareth Aird, an economist at Commonwealth Bank, noting that data on wages and jobs due this week would have to be startlingly strong to alter that view.

"There has been some genuine strength in the employment reports over the past four months, but we think we are still some way from labour market slack being eroded sufficiently to put genuine upward pressure on wages," said Mr Aird.

The New Zealand dollar inched up 0.25 per cent to US$0.7303, wedged between chart support at US$0.7250 and resistance at US$0.7330 ahead of a dairy auction due later Tuesday.

Dairy futures point to a 4 per cent rise in whole milk powder, a key export for New Zealand, according to analysts.

Milk prices have slipped in recent auctions, a contrast to Australia's most valuable export - iron ore - which has been benefiting from surging steel prices in China.

"Australia's commodity price basket has outperformed New Zealand's since June, supporting recovery in the Aussie over the kiwi," said Westpac senior currency strategist Sean Callow.

There were also risks of a sharp lift in milk volumes, from both New Zealand and elsewhere, hitting the global export market over the coming year, he added.

"On balance, we think we could see some downward pressure on world dairy prices," said Mr Callow.

"Our fair value estimate continues to point to upside potential on AUD/NZD. A retest of US$1.10 seems justified."

In bond markets, prices eased amid the improvement in risk sentiment, lifting New Zealand government bond yields seven basis points higher at the long end of the curve.

Australian three-year bond futures dipped two ticks to 98.040, while the 10-year contract fell 3.5 ticks to 97.3500.