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Australian, New Zealand dollars beleaguered as trade war adds to rate risk

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The Australian and New Zealand dollars were stuck near multi-month lows on Tuesday as China's reprisal for US tariffs shook markets globally and stoked speculation about interest rate cuts at home.

[SYDNEY] The Australian and New Zealand dollars were stuck near multi-month lows on Tuesday as China's reprisal for US tariffs shook markets globally and stoked speculation about interest rate cuts at home.

The Aussie dollar was pinned at US$0.6952, having sunk 0.8 per cent on Monday to as deep as US$0.6941, the lowest since the flash crash of early January. The last time the currency spent more than a day down at these levels was in early 2016.

The kiwi regained just a little ground to US$0.6586, but remained uncomfortably close to its recent six-month trough of US$0.6505. Both dropped on the safe-haven Japanese yen, with the Aussie shedding 1.4 per cent overnight to its lowest since January at 75.70.

The losses came after Beijing announced a retaliatory tariff move against US imports, following the United States' move last week to sharply increase levies on Chinese imports.

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The Chinese government's top diplomat later said China and the US had the "ability and wisdom" to reach a trade deal, while President Donald Trump said he thought recent talks would be successful.

Investors had assumed the worst and wagered the US Federal Reserve would have to cut rate by year end, which in turn added to pressure on the Reserve Bank of Australia (RBA) to ease.

Futures are fully priced for a quarter-point cut in the 1.5 per cent cash rate by August, with a move in July put at a 72 per cent chance. Yields on three-year bonds were down at 1.249 per cent and within a whisker of all-time lows.

Further bearish news came from the latest survey of Australian businesses from NAB which showed sales, profits and employment deteriorated in April.

The weakness in hiring would be alarming to the RBA which only recently signalled that it might cut rates if the labour market were not to remain healthy.

The Reserve Bank of New Zealand (RBNZ) has already taken the plunge and trimmed rates, in part because of the mounting risks to global growth. "The main negative catalyst at present is the intensifying US-China trade war, but if the RBNZ sees evidence global or domestic activity is slowing, then the chances of another rate cut will rise," said Westpac's head of NZ market strategy, Imre Speizer.

"The next NZD target is US$0.6525, with an extension to US$0.6425 possible," he added. " Longer term, we retain our bearish outlook, targeting US$0.6400-0.6500 by year-end."

Offshore risks kept New Zealand government bonds well bid, with two-year yields not far from record lows at 1.425 per cent.

Australian government bond futures firmed, with the three-year bond contract up 2 ticks at 98.770. The 10-year contract rose 2.5 ticks to 98.2900. 

REUTERS