By Wayne Cole
SYDNEY, Dec 6 (Reuters) - The Australian and New Zealand dollars slipped for a third straight session on Thursday as fears of renewed Sino-U.S. trade tensions spooked stock markets, while investors toyed with the idea of possible rate cuts at home.
Shares slid after Canadian authorities arrested a top executive of Chinese tech giant Huawei for extradition to the United States, straining ties between the two superpowers. Aussie dollar AUD=D3 dropped to $0.7224, wiping out a week's worth of gains and taking it further from the recent $0.7394 top. A test of support around $0.7200 now looked likely.
The kiwi dollar NZD=D3 fell to $0.6862 and away from its recent high at $0.6969.
Australian two-year bond yields AU2YT=RR dived to their lowest in nine months at 1.93 percent as futures 0#YIB: priced out any prospect of a rate hike next year and replaced it with a minor chance of an easing.
The sea change started after data on Australian economic growth out on Wednesday proved surprisingly soft, with wages and consumption notably subdued. was followed overnight by a dovish turn from the Bank of Canada which noted "there may be additional room for non-inflationary growth." Markets responded by sharply paring back expectations of further hikes there and punishing the Canadian dollar, causing collateral damage to the Aussie. helping of domestic data did nothing to alter the mood with retail sales up a modest 0.3 percent and the trade surplus missing forecasts. run of news led Nomura economist Andrew Ticehurst to abandon forecasts for rate rises by the Reserve Bank of Australia (RBA) in August 2019 and mid-2020.
"We now expect a flat cash rate profile continuing for an extended period," he said.
"We suspect the market could come to price in a small probability of a rate cut. While this goes further than our thinking, we do understand such sentiment and believe this could result in some yield curve steepening pressure."
Three-year bond futures YTTc1 shot up to 98.050, matching a peak from early September and a major rally from November's trough of 97.775.
The 10-year contract YTCc1 hit a three-month peak at 97.5250, and a break there would take it to ground not trod since June 2017.
Yields on New Zealand government 10-year bonds 0#NZTSY= fell to 2.478 percent, the lowest since May 2016 and down a huge 40 basis points in just the past month.
While the New Zealand economy has performed reasonably well in the past few months the Reserve Bank of New Zealand (RBNZ) has remained resolutely dovish on policy, leaving the market pricing in a small chance of an easing next year.
"The stubbornly dovish bias is understandable given inflation has been too low for too long," said Kiwi Bank economist Jarrod Kerr.
"It will take a lot to get RBNZ rate hikes. Rates are unlikely to head higher in 2019, and hikes are a 2020 story at the earliest."