Australia, NZ dollars tad higher but traders cautious

[SYDNEY] The Australian and New Zealand dollars held within recent ranges on Monday as investors tried to gauge whether a simmering tariff spat between the United States and China had the potential of exploding into a full-blown trade war.

The Australian dollar was 0.2 per cent firmer at US$0.7691, within a US$0.7643-US$0.7727 trading band that has held since late March.

The New Zealand dollar rose 0.2 per cent to US$0.7290 to sit slightly above Friday's low of US$0.7244.

Investors have been left to review a feast of news reports on trade after US President Donald Trump threatened further tariffs on Chinese imports last Thursday. In response, Beijing warned it was fully prepared to retaliate with a "fierce counter strike".

But there were also seemingly positive headlines with US officials hoping the dispute could be resolved through talks and Mr Trump predicting China would take down its trade barriers.

"While an outright US-China trade war is not on the cards yet the war of words is definitely on and it is likely to keep markets on edge over the coming weeks and potentially months," said Rodrigo Catril, Sydney-based senior forex strategist at NAB.

"If more of the same is to be expected in terms of trade tension, NZD and AUD are likely to stay confined to their recent ranges and with the AUD caught in the US-China crosshairs, NZD probably has more upside."

There has been heightened volatility in global financial markets since Mr Trump first slapped import tariffs on aluminium and steel products last month and later singled out China with extra duties.

Trade barriers would prove negative for the open, export-heavy economies of Australia and New Zealand and their currencies, which are also liquid proxies for risk.

"Peak liquidity and slowing global growth momentum suggest we prefer to sell spikes," said ANZ bank economists, referring to the kiwi which has eked out small gains in every single week since mid-March.

In contrast, the Aussie has dipped each week since March 9.

New Zealand government bonds gained, sending yields 1.5 basis points lower along most of the curve.

Australian government bond futures were mixed, with the three-year bond contract unchanged at 97.830. The 10-year contract dipped one tick to 97.32.

REUTERS