Australia dollar dips on yen buying, but dairy supports NZ dollar

[SYDNEY] The Australian dollar retreated from two-week highs on Thursday as sluggish factory activity across the world heightened risk aversion and boosted the yen, while the New Zealand dollar found support in rising dairy prices.

The Australian dollar dipped to US$0.7238, from US$0.7255 early, pulling away from a high of 73 US cents touched on Wednesday. It was still up 0.7 per cent since Monday and if sustained, it would be the first weekly gain since mid-April.

Support was found at US$0.7225, then a three-month trough of US$0.7145 set last week.

Investors were unmoved by a mixed bag of data at home. April retail sales rose 0.2 per cent, slightly undershooting expectations of a 0.3 per cent, while the trade deficit narrowed to A$1.6 billion versus forecasts of a A$2 billion gap.

"Today's numbers confirm that the economy is tracking at a modest pace despite what headline numbers would suggest," said Su-Lin Ong, a senior economist at RBC Capital Markets.

On Wednesday, data showed the Australian economy grew by a solid 1.1 per cent in the first quarter which sent the Aussie as far as 73 cents.

But RBC's Ms Ong said the details in the data reinforced a weak national income picture with wage growth remaining low.

Also weighing on the Aussie was a broadly stronger yen on heightened uncertainty about monetary policy in Japan.

Risk aversion was also heightened after factory surveys over the past 24 hours highlighted a sluggish global economy, even as the US Federal Reserve appears to be preparing jittery financial markets for a possible interest rate hike in coming months.

The Aussie dropped 0.7 per cent to 78.84 yen, not far from a recent trough of 78.14, while the kiwi slipped 0.4 per cent to 74.34.

Markets are now awaiting the US May ADP private employment report due later in the day.

The New Zealand dollar rose to US$0.6827 from as low as US$0.6761, as a second auction showing recovery in global dairy prices provided support.

"A modest further rise in average dairy prices at this morning's GDT auction kept the ascending path intact," said Kymberly Martin, senior market strategist at BNZ, in a research note.

Global dairy prices rose 3.4 per cent, its second consecutive auction of gains on strength of skim milk powder sales, though whole milk prices dropped at this month's first auction.

New Zealand government bonds gained, sending yields two basis points lower.

Australian government bond futures bounced off lows, with the three-year bond contract up three ticks at 98.390. The 10-year contract added 2.5 ticks to 97.7350, while the 20-year contract rose 1.5 ticks to 97.1500.

REUTERS