Aussie gains 1% with less easing risk seen

[SYDNEY] The Australian dollar rallied one per cent on Tuesday after minutes of the Reserve Bank of Australia's (RBA) May policy meeting encouraged markets to pare back the chances of a cut in interest rates.

The Aussie leapt to US$0.7358, away from a 2-1/2-month trough of US$0.7236 touched on Monday. Resistance was found at US$0.7375, then more solidly at US$0.7453, a major retracement level.

It regained vigour against the euro and yen following recent steep losses.

In minutes of the policy review, where the RBA reduced the cash rate by a quarter point to a record low 1.75 per cent, it appeared less dovish than some had anticipated.

"The minutes confirmed it was a line-ball decision on whether to cut or not," said Su-Lin Ong, a senior economist at RBC Capital Markets.

"The market will derive that another cut in the near-term is unlikely but we are not so sure."

Ms Ong forecasts an easing in June to a record low of 1.5 per cent.

Bond prices fell with interbank futures pricing a 26 per cent chance of a cut in July, from 36 per cent before the minutes. Yet, they are still fully priced for a move by the end of the year.

Australian government bond futures dropped sharply, with the three-year bond contract off 8 ticks to 98.390. The 10-year contract shed six ticks to 97.7150 in a bearish flattening of the curve. The 20-year contract slipped five ticks to 97.0900.

The two-year cash bond yield rose to 1.6 per cent, having touched a record low of 1.5 per cent on Monday.

Aussie buying dragged the New Zealand dollar higher to US$0.6823, from as low as US$0.6748 the previous day.

The global dairy prices auction held early on Wednesday morning would also show whether global dairy prices were continuing to fall, which could drag on the Kiwi.

Analysts expected the New Zealand dollar to trade between US$0.6750 and US$0.6840.

New Zealand government bonds eased, sending yields 3.5 basis points higher at the long end of the curve.

REUTERS