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Australia, NZ dollars near multi-week peak on metals, carry trades

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The Australian and New Zealand dollars hovered near multi-week peaks on Thursday as a rally in metals combined with low volatility globally and a soft greenback encouraged leveraged plays in higher-yielding assets.

[SYDNEY] The Australian and New Zealand dollars hovered near multi-week peaks on Thursday as a rally in metals combined with low volatility globally and a soft greenback encouraged leveraged plays in higher-yielding assets.

Australia's commodity-driven currency edged up 0.1 per cent to US$0.7778, within kissing distance from Wednesday's high of US$0.7779 - a level not visited since Oct 24.

The Aussie is seen ending the year about 8 per cent higher, reversing the losing streak of the past four years.

Trade was light across the board as many market participants were on holiday.

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Thursday's gains came as copper, seen as a barometer for global growth, held near a four-year high. Gold prices hovered close to a one-month top while oil was not far from this week's 2-1/2 year peak.

Australia is a major exporter of natural gas, metals and iron ore, so higher prices for these commodities add to the country's national income.

The New Zealand dollar also joined the party, climbing as far as US$0.7077 - a level not seen since mid-October.

The kiwi dollar is up 2 per cent for the year, almost matching its lacklustre performance in 2016.

The kiwi had suffered hefty losses in October over fears the country's new Labour-led government would introduce policies that will hurt foreign investment, migration and ultimately economic growth.

But the currency staged a comeback in December to be up 3.6 per cent in the month so far.

The gains in the antipodeans have been underpinned by a broadly weaker US dollar, which is at a 3-1/2 week low amid expectations other central banks will begin tapering monetary stimulus in 2018, reducing the US dollar's yield advantage.

That stoked carry trades in which investors borrow in low-yielding currencies such as the euro or the yen for higher yielding assets such as the Aussie or the kiwi.

The yield premium demanded to hold Aussie 10-year debt over US Treasuries has widened to 27 basis points from as low as 8 basis points in late November.

"The Aussie bulls have been enthused not just by the near multi-year lows in FX volatility, which has helped the hunt for carry, but...by yield differentials working in favour of AUD appreciation," said Chris Weston, chief strategist at Melbourne-based IG.

New Zealand government bonds rose in line with US Treasuries, sending yields about 4 basis points lower at the long-end and 2-3 basis points lower at the short-end of the curve.

Australian government bond futures edged higher too, with the three-year bond contract up half a tick at 97.805. The 10-year contract rose 2.5 ticks to 97.3050.

REUTERS