By Wayne Cole
SYDNEY, Oct 23 (Reuters) - The Australian and New Zealand dollars were on the defensive on Tuesday as optimism over Chinese policy stimulus proved all-too fleeting and the yuan continued to give ground.
The Aussie AUD=D3 was looking shaky at $0.7065, after again failing to challenge resistance around $0.7150/60. The lapse leaves it uncomfortably close to the recent 32-month trough at $0.7041, and a break there would be very bearish.
The New Zealand dollar NZD=D3 was back at $0.6551, having been as far as $0.6620 overnight. The next ledge of support is at $0.6524.
Sentiment had briefly brightened on Monday when China pledged new policies to support private companies, including helping them raise funds in capital markets. news sparked a bounce in stocks but did little to help the yuan CNY= , in part because investors feared Beijing was digging in for a protracted trade battle with Washighton given there was no sign of the U.S. backing down.
"Because of the relative business cycle position, the market is inclined to believe that the U.S. holds the upper hand in negotiations and this plays against a quick resolution of trade tensions," said Alan Ruskin, macro strategist at Deutsche.
"Politics, the growth cycle and U.S.-China policy divergence, are all still playing firmly in the direction of a weaker yuan versus the dollar."
That is a negative for the Aussie as investors use it to hedge against, and wager on, risks in the Chinese economy and its currency. As a result, sustained weakness in the yuan often manifests as pressure on the Aussie.
The currency also faced political uncertainty at home as Australia's ruling Liberal National government suffered a disastrous by-election loss over the weekend, snatching away its one-seat majority. divisive campaign seemed to have soured the mood of consumers last week with the ANZ-Roy Morgan confidence index diving 6 percent to its lowest in more than a year.
All components of the survey from family finances to the economic outlook fell sharply, posing a risk to household spending.
Australian government bond futures were a shade firmer, with the three-year bond contract YTTc1 up 1.5 ticks at 97.900. The 10-year contract YTCc1 added 1 tick to 97.2950.
Yields on New Zealand government bonds 0#NZTSY= were down around 1 basis point.
(Editing by Shri Navaratnam)