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Australia, NZ dollars lose altitude as Treasury yields climb

[SYDNEY] The Australian and New Zealand dollars inched lower on Monday as the growing risk of a hike in US interest rates lifted Treasury yields to nine-year peaks while domestic policies remained very much on hold.

The Australian dollar eased a touch to US$0.7825, having now lost ground for three weeks in a row. Chart support was strong around US$0.7800, but a break there would open the door to US$0.7740.

The US currency was aided by speculation President Donald Trump might choose former Federal Reserve governor Kevin Warsh to head the central bank.

Mr Warsh is considered more hawkish than current chair Janet Yellen so his appointment might lead to faster hikes in interest rates. The risk was enough to nudge yields on two-year Treasuries up to 1.503 per cent, ground not visited since late 2008.

That in turn has narrowed the Aussie's premium over the US dollar to 50 basis points, when it had been over 60 a couple of weeks ago.

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The Reserve Bank of Australia (RBA) holds its October policy meeting on Tuesday and is considered certain to keep rates at 1.5 per cent for another month.

Indeed, policy makers have made it clear there is no prospect of a tightening for some time to come, suggesting the Fed funds rate could match if not top the RBA cash rate in the next few months.

The RBA highlighted the historically high level of household debt as a reason to be cautious on tightening, especially as tighter rules on lending were bringing house prices off the boil.

Data from property consultant CoreLogic showed home prices for the combined capital cities rose just 0.3 per cent in September, pulling annual growth down to 8.5 per cent from 10.5 per cent two months before.

A slowing housing market combined with a mountain of debt meant the RBA would find it "more difficult than expected to normalise policy," said UBS Economist George Tharenou, and would thus lag the Fed.

Neither is New Zealand's central bank in any hurry to move, having kept a steady outlook at its policy meeting last week.

That has kept the kiwi subdued at US$0.7196 and well short of the September top of US$0.7435.

Not helping has been the lack of a government following an inconclusive election. The New Zealand First Party, which holds the balance of power, will begin preliminary talks with both the ruling National Party and the Labour Party this week.

"The kiwi has downside risks, given the recent rebound in the US dollar and NZ election uncertainty," said Westpac analyst Imre Speizer.

"We target US$0.7130."

New Zealand government bonds were a fraction firmer in price, nudging yields a basis point lower across the curve.

Australian government bond futures dipped in line with Treasuries. The three-year bond contract eased two ticks to 97.790, as did the 10-year contract at 97.1100.


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