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Australia, NZ dollars pressured as yield buffers erode

[SYDNEY] The Australian dollar was pinned uncomfortably close to major chart support on Monday as its yield buffer over the US dollar shrank to its smallest since 2001, while its New Zealand counterpart was in only slightly better shape.

The Aussie dollar was stuck at US$0.7653 to be just a whisker above support at US$0.7625/30, a zone that has held solid for two weeks running.

A break there would take it back to territory last visited in early July and would open the way for a retracement to at least US$0.7570, if not US$0.7535.

The currency has not been helped by a steady decline in its yield premium as the market pushes out the prospect of a rate hike in Australia, while almost fully pricing in a US rise for December and at least one more next year.

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The futures market is not fully priced for a local hike until February 2019. Just last week, the Reserve Bank of Australia (RBA) said it no longer sees underlying inflation reaching the floor of its 2-3 per cent target band until early 2019, over a year later than its previous forecast.

As a result the premium offered by Australian two-year government debt over its US counterpart has shrunk to only 15 basis points, the thinnest since early 2001.

"Australia's reliance on foreign investors to fund our large accumulated overseas debt is dependent on offering an attractive yield or a cheaper currency," said Westpac chief economist Bill Evans.

He noted the last time Australian rates fell below those in the United States was in June 1999 to December 2000, a period when the Aussie declined from around US$0.65 to as low as US$0.51.

"We expect the AUD to weaken to US$0.70 by end 2018 and then to US$0.68 by mid 2019," said Mr Evans.

The New Zealand dollar edged down to US$0.692, moving further away from the two-week high of US$0.698 hit last week.

A slew of central bank related news, including a surprisingly upbeat monetary policy statement on Thursday, had offered some support to the kiwi, though again markets were not implying much chance of a rate rise for many months to come.

"We believe that NZD has been oversold over the last couple of months, and believe NZD/USD will lift above US$0.70 in a relatively short period time," said Elias Haddad, a senior currency strategist at CBA.

"Over coming weeks, we see a re-test of the 200-day moving average of US$0.7140." New Zealand government bonds eased, sending yields 5.5 basis points higher at the long end of the curve.

Australian government bond futures dipped, with the three-year bond contract off one tick at 98.030. The 10-year contract eased half a tick to 97.3650.