Australian, New Zealand dollars hostage to market's mood swings on trade

[SYDNEY] The Australian and New Zealand dollars on Tuesday were recovering from a bad case of whiplash as the market mood on the Sino-US trade dispute swung between hope and despair, and back again.

The Aussie dollar was breathing a sigh of relief at US$0.6760, having been as low as US$0.6690 at one stage on Monday when trade worries were at their peak. It still faces stiff chart resistance from US$0.6790 to US$0.6822.

There was an even sharper rally on the safe-haven yen as the Aussie rebounded to 71.45 yen from a decade-low around 69.93.

Likewise, the kiwi was clinging to US$0.6370 after carving out a four-year trough of US$0.6342 overnight.

Both were aided when China again fixed its yuan at a firmer midpoint level than many expected, lessening pressure on other currencies to depreciate to keep exports competitive.

Markets had steadied overnight after US President Donald Trump predicted a trade deal with China after positive gestures by Beijing. Trump also said Chinese officials had called US negotiators to resume talks, something Beijing declined to confirm.

"Markets have latched onto the headlines as a sign that US-China tensions are unlikely to escalate further, and as evidence that President Trump is sensitive to (falling) stocks," said Tapas Strickland, a director of economics at NAB. "But as we have been highlighting for some time, President Trump's continued escalation of tensions gives little room for China to compromise without losing face, which makes a deal less likely in the near term."

The Reserve Bank of Australia (RBA) has repeatedly warned that the uncertainty over trade is depressing business confidence and investment intentions globally, one reason it stands ready to cut rates again if necessary.

Futures imply a 68 per cent chance rates could be cut by a quarter point to 0.75 per cent in October, with a move by November fully priced in. Another easing to 0.5 per cent is seen by April at the latest.

Speaking on Tuesday, RBA Deputy Governor Guy Debelle said 0.5 per cent was around the floor for rates seen in some other developed nations, though he hoped they would not have to go there.

He also noted that a further fall in the Aussie would be helpful for the economy and that the ratio of Australia's current account deficit to GDP is the smallest in decades, making the country less vulnerable to external shocks.

Investors are also wagering on more cuts from the Reserve Bank of New Zealand (RBNZ) following its surprisingly sharp half-point easing to 1 per cent earlier this month.

A move to 0.75 per cent is seen as a better-than-even chance, and is fully priced by February.

Yields on New Zealand two-year paper are already down at 0.83 per cent, having touched all-time lows of 0.75 per cent a couple of weeks ago.

Australian three-year yields hit a fresh record low of 0.617 per cent on Monday and were last at 0.698 per cent. The 10-year bond future contract eased 3.5 ticks on Tuesday to 99.0750, implying an yield of just 0.925 per cent.

REUTERS