Australian dollar steady against greenback, weakens versus yen to test support

[SYDNEY] The Australian dollar was little changed against the US dollar on Friday, but teetered near a critical support level against the safe-haven yen due to fears that US President Donald Trump's aggressive trade diplomacy could lead to recession.

Mr Trump ramped up his battle against a surge of immigrants, saying he would impose a tariff on all goods coming from Mexico starting at 5 per cent and increase monthly until it reached 25 per cent.

Investors dumped shares and fled to perceived safer assets, including bonds, fearing Mr Trump's latest move, on top of his ongoing trade battle with China, could tip the United States, and perhaps the world, into recession.

Against the greenback, the Aussie was unmoved at US$0.6912 as traders said bad news was already priced in.

"Our view of the Aussie holding here and moving above US$0.7000 almost depends on the trade outlook improving and that is looking almost improbable," said Ray Attrill, head of forex strategy at National Australia Bank. "So, 65 cents is not a particularly radical call anymore."

The outlook further darkened when a key measure of Chinese manufacturing activity disappointed for May, questioning the effectiveness of Beijing's stimulus steps.

Against the Japanese yen, a weakening Australian dollar was close to testing a crucial level.

Last quoted at 75.52 yen, the Australian dollar was within a whisker of key chart support around 75.30. A breach could see the Aussie tumble as far as 71.66.

"The Aussie-yen cross is looking vulnerable at the moment," said Mr Attrill.

"Just judging from Asian markets reaction and oil under pressure as well, it does leave the Aussie somewhat vulnerable to a deeper correction later tonight."

In a broader risk-off move, Australian government bonds gained, with the three-year bond contract up 2 ticks at 98.89 - not far from last week's all time high of 98.92. The 10-year contract gained 4.5 ticks to a record peak 98.50.

Domestic news has not been in the Aussie's favour with recent data suggesting the country's economic growth likely braked to a decade low last quarter.

A slowing economy, rising unemployment and lukewarm inflation has put pressure on the country's central bank to ease policy.

Analysts polled by Reuters this week unanimously expect the Reserve Bank of Australia (RBA) to cut its cash rate to an all-time low of 1.25 per cent at its monthly meeting on June 4. A second cut is widely expected in August.

"The AUD has been short on luck," said Daniel Been, head of FX at ANZ, which has pegged 'fair value' for the currency at 65 US cents.

"How low the AUD falls will be defined by how aggressively the RBA eases and the success of Chinese stimulus efforts."

Across the Tasman, the New Zealand dollar was notably flat at US$0.6511. For the week, it is down 0.6 per cent so far.

New Zealand government bonds gained, sending yields about 6 basis points lower at the long-end of the curve.

REUTERS