Australian, New Zealand dollars ground down; record surplus no help

[SYDNEY] The Australian and New Zealand dollars were under pressure on Tuesday amid doubts Sino-US trade talks would make progress anytime soon, which even overshadowed news Australia had notched up its first current account surplus in 44 years.

The Aussie slipped 0.3 per cent to US$0.6690, taking it closer to the recent decade low of US$0.6678. The kiwi dropped 0.6 per cent to a fresh four-year trough at US$0.6270, extending a downtrend that has lasted almost six weeks now.

Part of the decline was due to strength in the US dollar which was benefiting broadly from weakness in the euro and sterling.

The Chinese yuan also touched an all-time low on the US currency in offshore trade after Bloomberg News reported that Chinese and US officials are struggling to agree a schedule for a round of trade negotiations that had been expected this month.

Both the Aussie and kiwi have shown a strong correlation with the yuan in recent weeks, with investors using them as a liquid proxy for trade risk.

At home, Australian economic data were too mixed to alter the outlook for lower interest rates.

The Reserve Bank of Australia (RBA) is widely expected to end its September meeting on Tuesday with rates held at 1 per cent, but also reiterate that it would ease again if needed and that rates would stay low for a long time to come.

Futures imply a 70 per cent chance of a cut to 0.75 per cent in October, and are fully priced by November. A further move to 0.5 per cent is seen by March at the latest.

The need for stimulus was underlined by figures showing retail sales fell 0.1 per cent in July, when analysts had looked for a rise of 0.3 per cent.

Persistent weakness in consumption is a major reason gross domestic product (GDP) data due on Wednesday are expected to show the economy expanded at its slowest annual pace in at least a decade last quarter.

The softness in household spending offset news Australia enjoyed its largest current account surplus on record last quarter at A$5.9 billion (S$5.55 billion), boosted by high export prices and strong demand from China.

"A structural improvement in Australia's external position is underway...the previous couple of centuries of persistent current account deficits are coming to an end," said CBA chief economist Michael Blythe.

"A shift to current account surplus offers a degree of protection against the current uncertain economic backdrop and potentially volatile funding markets."

Bond markets were quiet with yields holding near historic lows. Australian three-year bond futures were flat at 99.310, with 10-year contract off 1 tick at 99.0650.

REUTERS