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Australian, NZ dollars set for second losing week as politics rules

[SYDNEY] The Australian dollar slipped to a fresh 3-1/2 month trough on Friday after the country's government lost its one-seat majority in the lower house, after the High Court ruled the deputy prime minister ineligible to remain in parliament.

The currency went as low as US$0.7623, a level not seen since July 11. It was last off 0.26 per cent at US$0.7641. For the week, the Aussie is down 2.3 per cent, the most since November 2016.

The government may regain its razor-thin majority if former Deputy Prime Minister Barnaby Joyce wins a by-election expected on Dec 2.

Forex investors, however, do not see this uncertainty as a major overhang for the Australian dollar.

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"The base case for the market is that Joyce will win his seat back in the by-election," said Tapas Strickland, Sydney-based economist at National Australia Bank.

"The government needs support from one independent cross- bencher for only four sitting days between now and the by-election. So, we think there will be limited impact for the government in terms of policies."

The Aussie had already been battered by investors after consumer price inflation rose at a slower-than-expected pace in the September quarter, prompting the market to push back chances of a rate hike next year.

The Reserve Bank of Australia (RBA) has kept rates at a record low 1.50 per cent for more than a year now and rates futures imply the next move might not be until November 2018.

The Aussie also took a beating after two major central banks struck a surprisingly dovish tone this week.

First, the Bank of Canada indicated it was finished with raising rates after two hikes this year.

That was followed by a European Central Bank meeting on Thursday in which policymakers assured markets they would extend its bond-buying programme as necessary. That sent the euro sliding against the US dollar.

That means the US Federal Reserve is one of the few central banks seen continuing to tighten its monetary policy, keeping the greenback buoyant.

Elsewhere, the New Zealand dollar sank to a new five-month trough of US$0.6818, a level unseen since early May and matching a trough last reached in June 2016.

The currency was set for its second weekly loss, having been under pressure since the left-leaning Labour Party won control of government in coalition with two minor parties.

Investors are worried the coalition will go hard against immigration and foreign investment and shake up the mandate of the Reserve Bank of New Zealand.

New Zealand government bonds eased, sending yields 2.5 basis points higher at the long end of the curve.

Australian government bond futures slipped, with the three-year bond contract down one tick at 97.930. The 10-year contract was off two ticks at 97.20.

REUTERS