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Australian dollar heads for 4th week of losses as rate risks mount

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The Australian dollar was heading for a fourth straight week of losses on Friday as uncertainty shrouded the Sino-US trade talks, while mounting speculation of more rate cuts at home tugged bond yields sharply lower.

[SYDNEY] The Australian dollar was heading for a fourth straight week of losses on Friday as uncertainty shrouded the Sino-US trade talks, while mounting speculation of more rate cuts at home tugged bond yields sharply lower.

The Aussie was flat at US$0.6764, having eased 0.3 per cent for the week so far and almost 1.9 per cent for November as a whole. The break of chart support at US$0.6770 also risked a further pullback to US$0.6724.

That was a marked contrast to the New Zealand dollar which was heading for its third week of gains helped by a run of upbeat domestic data. The kiwi was trading at US$0.6420, up 0.3 per cent for the week so far.

The Aussie has been under fire since the Reserve Bank of Australia (RBA) indicated rates would have to fall to just 0.25 per cent before it considered quantitative easing, leading markets to price in not just one cut next year but two.

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Futures are fully priced for a quarter point easing to 0.5 per cent by April and imply around a 44 per cent chance of a move to 0.25 per cent by year end.

The only positive for the Aussie was that the RBA had shown no appetite for moving at its next policy meeting on Dec 3, giving it a break until the first meeting of 2020 in February.

"It seems unlikely that the RBA will opt for a surprise rate cut in December where just 3 basis points is priced," said Tom Nash, a strategist at HSBC Bank Australia. "Near-term policy inertia favours relative currency stability versus the USD."

"AUD-USD continues to trade within the same tight US$0.67-0.69 range that has held for the past four months, while three-month implied FX volatility recently reached the lowest levels this century," he added.

"We maintain our long-term forecast of US$0.68. It would likely take something dramatic from offshore – perhaps related to US-China "phase one" trade deal negotiations – to trigger a breakout."

Bonds have been much more energetic with yields on three-year paper dropping 13 basis points just this week to 0.61 per cent, not far from the all-time low of 0.57 per cent.

Yields on 10-year bonds were off 8 basis points for the week at 1.01 per cent and approaching their record trough of 0.85 per cent.

The rally has been more limited for New Zealand bonds with 10-year yields down 5 basis points for the week at 1.32 per cent, so widening the spread over Aussie debt.

REUTERS