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Australia, NZ dlrs beleaguered as trade war adds to rate risk

Published 14/05/2019, 02:33 pm
Australia, NZ dlrs beleaguered as trade war adds to rate risk
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By Wayne Cole

SYDNEY, May 14 (Reuters) - The Australian and New Zealand dollars were stuck near multi-month lows on Tuesday as China's reprisal for U.S. tariffs

shook markets globally and stoked speculation about interest rate cuts at home.

The Aussie dollar AUD=D3 was pinned at $0.6952, having sunk 0.8 percent on Monday to as deep as $0.6941, the lowest since the flash crash of early January. The last time the currency spent more than a day down at these levels was in early 2016.

The kiwi NZD=D3 regained just a little ground to $0.6586, but remained uncomfortably close to its recent six-month trough of $0.6505. Both dropped on the safe-haven Japanese yen, with the Aussie shedding 1.4 percent overnight to its lowest since January at 75.70 AUDJPY= .

The losses came after Beijing announced a retaliatory tariff move against U.S. imports, following the United States' move last week to sharply increase levies on Chinese imports. Chinese government's top diplomat later said China and the U.S. had the "ability and wisdom" to reach a trade deal, while President Donald Trump said he thought recent talks would be successful.

Investors had assumed the worst and wagered the U.S. Federal Reserve would have to cut rate by year end, which in turn added to pressure on the Reserve Bank of Australia (RBA) to ease.

Futures are fully priced for a quarter-point cut in the 1.5% cash rate by August 0#YIB: , with a move in July put at a 72% chance. Yields on three-year bonds AU3YT=RR were down at 1.249% and within a whisker of all-time lows.

Further bearish news came from the latest survey of Australian businesses from NAB which showed sales, profits and employment deteriorated in April. weakness in hiring would be alarming to the RBA which only recently signalled that it might cut rates if the labour market were not to remain healthy.

The Reserve Bank of New Zealand (RBNZ) has already taken the plunge and trimmed rates, in part because of the mounting risks to global growth.

"The main negative catalyst at present is the intensifying U.S.-China trade war, but if the RBNZ sees evidence global or domestic activity is slowing, then the chances of another rate cut will rise," said Westpac's head of NZ market strategy, Imre Speizer.

"The next NZD target is $0.6525, with an extension to $0.6425 possible," he added. " Longer term, we retain our bearish outlook, targeting $0.6400-$0.6500 by year-end."

Offshore risks kept New Zealand government bonds 0#NZTSY= well bid, with two-year yields NZ2YT=RR not far from record lows at 1.425 percent.

Australian government bond futures firmed, with the three-year bond contract YTTc1 up 2 ticks at 98.770. The 10-year contract YTCc1 rose 2.5 ticks to 98.2900. (Editing by Kim Coghill)

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