The Australian dollar hovered around a five-month trough on Monday, while its New Zealand cousin was near its lowest in 1-1/2 years, as shrinking yield premiums over the U.S. dollar prompted investors to unwind carry trades, reports Reuters.
The Australian dollar was huddled at $0.7553 and nursing last week’s losses of 1.3 percent. The New Zealand dollar stood at $0.6815, within spitting distance of Friday’s $0.6781 which was the lowest since June 2016. The currency fell 1.6 percent last week. The Aussie has been on a downtrend since early September when it climbed atop $0.8100. It has since lost 6.3 percent but is still up 4.7 percent for the year so far.
The Aussie was thumped last week by surprisingly soft wage data which implied inflation will remain lukewarm in the medium term despite the recent strength in employment. The Reserve Bank of Australia (RBA) has also given a strong signal that interest rates in the country are set to stay at record lows for a long time to come. That has prompted the futures market to push out the likely timing of a hike in the 1.5 percent cash rate to early 2019. A couple of months ago, a move had been priced in for July next year.
In contrast, the U.S. Federal Reserve seems hell-bent on tightening policy. “The AUD continues to find little love and this feels fair from a fundamental standpoint,” said Chris Weston, Melbourne-based chief market strategist at IG. “Rallies in the AUD crosses should be sold this week, with little on the economic docket to drive shorts to cover with any great conviction,” Weston added.
Investors will keep an eye on the yield differential between Aussie and U.S. debt this week with the U.S. two- and five-year Treasury yields set to rise above those of Aussie government debt for the first time since 2000. The gap between Australian and U.S. two-year government yields has dwindled to 7 basis points, down from 60 in September and the smallest spread since mid-2000.
Likewise, yields on New Zealand government two-year debt are just 29 basis points above those in the United States, with the spread having more-than-halved since September. New Zealand government bonds gained, sending yields 3 basis points lower at the long end of the curve. Australian government bond futures rose, with the three-year bond contract up 1 tick at 98.060. The 10-year contract added 2.5 ticks to 97.4350.