Australian, New Zealand dollars bounce, bonds take a breather

[SYDNEY] The Australian and New Zealand dollars won a reprieve from risk aversion on Tuesday as stock markets in Asia bounced and speculation mounted that stimulus was in the cards from the world's major central banks.

The Aussie clawed its way back to US$0.7121, after being as low as US$0.7066 at one stage on Monday. The gains underlined the strength of support around US$0.7050, though stiff resistance was expected between US$0.7135 and US$0.7168.

The kiwi dollar firmed to US$0.6917 and away from Monday's trough at US$0.6870. It faces major resistance at US$0.6938.

Bonds took a breather from their meteoric rally, with Australian 10-year debt futures just off a record high at 98.2100.

Yields on three-year paper were well below the 1.5 per cent cash rate at 1.41 per cent, while futures are priced for at least one easing this year.

"Despite having almost two rate cuts in the forward profile, we think there is scope for 3-year bonds to rally further," analysts at Westpac said in a note.

"That would be supported by the view that global yields will remain low for longer in an environment in which inflation expectations are minimal."

The Reserve Bank of Australia (RBA) continues to resist pressure for an easing, putting its faith in the resilience of the domestic labour market.

RBA Assistant Governor Luci Ellis on Tuesday dismissed concerns the health of the labour market might be overstated and pointed to a range of indicators in support.

"The labour market has unambiguously improved," she said. "One can be reasonably confident in the steer the labour market data are giving us, because it is coming from multiple, independently collected data sets."

The Reserve Bank of New Zealand holds its policy meeting on Wednesday and is considered certain to keep rates steady, while reiterating its outlook for no change until 2021.

In any case, Australia and New Zealand are hardly alone in having markets speculating on a rate cut.

In just the past week futures have sharply narrowed the odds on a rate cut from the Federal Reserve as the US yield curve inverted and signalled a risk of future recession.

Bank of Japan policymakers debated ramping up monetary stimulus at their rate review this month as heightening overseas risks weighed on the country's fragile economy, a summary of the meeting showed on Tuesday.

Markets are also now pricing in rate cuts in Canada and possible further quantitative easing in the European Union.

REUTERS