Australian dollar hits 5-mth low on yen, NZ$ fares better

[SYDNEY] The Australian dollar was back on the defensive on Tuesday as its fading appeal as a higher-yielding carry currency caused a shake-out in long positions against the Japanese yen.

The Aussie was stuck at US$0.7606, after an attempted bounce overnight failed at US$0.7645.

Its New Zealand counterpart fared better at US$0.6924 , having rallied from US$0.6854 on Monday as speculators took profits on short positions for the month end.

The Aussie suffered most against the yen, hitting a five-month low at 84.31 yen and breaking support at US$84.45. The next major chart target was put at 83.68.

The Aussie has slipped steadily from atop 88 yen at the start of the month, in part reflecting its diminishing yield advantage over the US dollar.

The premium paid by Australian government two-year debt over US notes has shrunk to a single basis point, from as much as 60 basis points back in September. The spread on short-term swap rates is already negative.

The last time Australian yields traded under the US was in mid-2000, when the Aussie was changing hands around 63 yen.

"We still contend that Aussie will drop through US$0.7500 one side or other of year-end, driven primarily by a decisive move into negative territory for the likes of the 2-year AU-US swap rate differential," said NAB's global head of FX strategy, Ray Attrill.

"It may take an increase in confidence that the spread is not coming back into Australia's favour anytime soon to see the Aussie lower," he added.

Attrill noted that when the spread went negative in the late 1990s it took a year or more before the shift was reflected in a sharply weaker currency.

The Aussie also ran into selling against the kiwi, falling back to a five-week trough at NZ$1.0965.

There was little in the way of domestic economic data out on Tuesday and the next local event was the Reserve Bank of New Zealand's financial stability review on Wednesday morning.

The review is a wide ranging report on the banking sector and household finances and includes a media conference with the head of the central bank.

New Zealand government bonds firmed in price, nudging yields down as much as 2.5 basis points.

Australian government bond futures likewise gained, with the three-year bond contract up 2 ticks at 98.090. The 10-year contract rose 3 ticks to 97.4900.

REUTERS