Australian, New Zealand dollars gain as US yields swing lower

[SYDNEY] The Australian and New Zealand dollars edged higher on Tuesday as speculation about a slower pace of rate hikes from the Federal Reserve dragged on their US counterpart.

Local bond markets rallied hard in tandem with US Treasuries, driving Australian 10-year bond yields to their lowest in three months at 2.54 per cent.

The Aussie inched ahead to US$0.7368 and back toward Monday's four-month peak at US$0.7394. Dealers reported stiff resistance above US$0.7380 which was proving tough to break.

The Reserve Bank of Australia (RBA) held its rates at 1.5 per cent at its monthly policy meeting, as widely expected, but remained upbeat on the economy in a sign the next move was still likely to be higher.

"The Australian economy is performing well," said RBA Governor Philip Lowe. "With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely."

Data on Tuesday showed the country's current account deficit narrowed to A$10.7 billion (S$10.76 billion) in the third quarter, thanks to rising export receipts particularly for liquefied natural gas.

Net export volumes added 0.4 percentage points to gross domestic product (GDP), twice what analysts expected. Government spending also added to growth in the quarter with a large pipeline of infrastructure projects planned.

The GDP report is due on Wednesday and analysts forecast growth around 0.6 per cent for the third quarter and a brisk 3.3 per cent for the year.

"We expect the annual GDP growth to sit at an above trend 3.25 per cent over the next few years," said CBA economist Kristina Clifton. "There is plenty of public infrastructure spending still to come and non-mining business investment looks set to post another increase in 2018/19."

"However there are downside risks to household consumption because falling dwelling prices may trigger negative wealth effects."

The New Zealand dollar hit a fresh six-month high of US$0.6960 as it continued to gain from the hopes of a lull in a growing trade war between the country's key trading partners, the United States and China.

"While the pace of ascent has slowed, the NZD is still being impacted by the positive tone left after the weekend's G-20 meeting, which sees it grinding higher," said Sharon Zollner, Chief Economist at ANZ Bank.

The next big risk for the kiwi was a an auction for dairy, the country's top goods export, with futures markets suggesting whole milk powder prices would rise 2 per cent.

New Zealand government bonds gained, sending yields 5 basis points lower at the long end of the curve.

Australian government bond futures jumped, with the three-year bond contract up 4 ticks at 97.955. The 10-year contract rose 7.5 ticks to 97.4550, flattening the yield curve.

REUTERS