Renewable Energy

Australia, NZ dlrs on hold as bond yields hit historic lows

Credit: REUTERS/THOMAS WHITE

The Australian and New Zealand dollars held steady on Monday as markets waited on the next developments in the Sino-U.S. trade dispute, while bond yields reached record lows as investors wagered heavily on rate cuts at home.

By Wayne Cole

SYDNEY, May 27 (Reuters) - The Australian and New Zealand dollars held steady on Monday as markets waited on the next developments in the Sino-U.S. trade dispute, while bond yields reached record lows as investors wagered heavily on rate cuts at home.

The Aussie dollar AUD=D3 was parked at $0.6931 and above its recent five-month low of $0.6865 - a level that has turned into strong chart support after surviving several tests. Resistance is now lined up at $0.6940 and $0.6960.

The kiwi dollar NZD=D3 had inched to $0.6553 and away from last week's seven-month trough of $0.6482.

Both currencies have been pressured, and bonds buoyed, by mounting expectations of falling interest rates.

Just last week, Reserve Bank of Australia (RBA) Governor Philip Lowe said a rate cut would be considered at the next policy meeting on June 4, leading all four of the major banks to tip a quarter-point easing in the 1.5% cash rate.

Futures 0#YIB: imply an 84% probability of a cut next week with a move to 1% fully priced by October. The market has gone even further and priced in a real chance of reaching 0.75% by the middle of next year.

"Westpac is now forecasting three cuts in 2019 in June; August and November to push the cash rate from 1.5% to 0.75% and to hold at that level through 2020," said Westpac chief economist Bill Evans.

"While back in February we expected the low in the AUD to be $0.68, we have now shaved that forecast back to $0.66 by end 2019," he added. "This forecast is also predicated on our constructive view on commodity prices and a steady U.S. federal funds rate over 2019."

The bond market is also moving in that direction, with yields on three-year paper AU3YT=RR hitting a fresh record low at 1.09%, a world away from where they started this year at 1.82%.

The 10-year bond future YTCc1 eased back 2 ticks on Monday to 98.4500, but that was from an all-time high.

The Reserve Bank of New Zealand has already cut its rates to 1.5% and markets are wagering on another easing to 1.25% by year-end RBNZWATCH.

Yields on two-year bonds NZ2YT=RR fell to a record low on Monday at 1.325%, having begun the year at 1.72%.

Some support for the Aussie has come from surging prices for iron ore, Australia's biggest export earner. Chinese futures for the ore climbed almost 5% last week to top $100 a tonne, a huge windfall to miners given the Aussie is also so weak against the U.S currency.

(Editing by Richard Borsuk)

((Wayne.Cole@thomsonreuters.com; 612 9321 8162; Reuters Messaging: wayne.cole.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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