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Australian, New Zealand dollars dogged by trade doubts, bonds get the benefit

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The Australian and New Zealand dollars backpedalled on Thursday, as concerns the Sino-US trade dispute would drag on for a long time yet clouded the outlook for global growth and drove Aussie bond yields to five-week lows.

[SYDNEY] The Australian and New Zealand dollars backpedalled on Thursday, as concerns the Sino-US trade dispute would drag on for a long time yet clouded the outlook for global growth and drove Aussie bond yields to five-week lows.

Completion of a "phase one" US-China trade deal could slide into next year, trade experts and people close to the White House told Reuters on Wednesday.

The Aussie dollar duly eased back to US$0.6788, having been as high as US$0.6831 at one stage on Wednesday, and now risks testing support around US$0.6770.

Likewise, the kiwi slipped to US$0.6408, from a top of US$0.6436, though it was still holding a slight gain for the week. Immediate support comes in at US$0.6405, with another layer at US$0.6382.

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The kiwi continues to outperform the Aussie, which hit a three-month trough at NZ$1.0590 having slid 2 per cent in little more than a week.

"AUD/NZD can continue to ease towards its 200-day moving average of 1.0568 in the near-term in our view," said Kim Mundy, a currency strategist at CBA.

"Australian-NZ interest rate spreads can continue to widen because of higher expectations for additional monetary policy easing in Australia compared to New Zealand."

The Reserve Bank of New Zealand wrongfooted investors last week by skipping a chance to cut rates and emphasised it was on hold for the time being.

Its next policy meeting is not until Feb 12 and markets imply only a 27 per cent chance of an easing at the time.

Minutes of the Reserve Bank of Australia's (RBA) November policy meeting out this week showed its Board came much closer to easing than first thought, leading the market to narrow the odds on a future move.

Futures imply a 20 per cent chance of a quarter-point cut at the next meeting on Dec 3, rising to 66 per cent by February.

Domestic bond markets have already diverged. Yields on Australian 10-year debt have fallen a steep 29 basis points to 1.06 per cent in the past two weeks, while those on New Zealand bonds have eased only 18 basis points to 1.34 per cent.

The Australian 10-year bond future added another 1.5 ticks on Thursday to 98.9450 and reached its highest since mid-October.

Speculation is also growing that the RBA will ultimately have to embark on some form of quantitative easing to reach its employment and inflation goals.

RBA Governor Philip Lowe is due to speak on the topic next week and has, in the past, indicated any form of QE would likely start with buying government bonds.

Kieran Davies, a market economist at NAB, estimated the RBA would have to buy around A$115 billion (S$106.4 billion) of the outstanding federal debt of roughly A$500 billion, to achieve its goals.

"We calculate that A$115 billion of bond purchases could reduce the 10-year bond yield by roughly 35 bps, with a range of 10 to 70 bps, and lower the exchange rate by about 1.8 per cent, with a range of 0.5 per cent to 3.5 per cent," he added.

REUTERS