By Wayne Cole
SYDNEY, May 20 (Reuters) - The Australian dollar firmed on Monday in the wake of a surprise election victory by the country's conservative government, although the gains were pared in the face of Sino-U.S. trade tensions and bets for a local rate cut.
The Aussie dollar AUD=D3 was last at $0.6906, having bounced from a four-month trough of $0.6865. The currency was briefly quoted as high as $0.6990 but dealers said that was a miss-hit and the true dealt peak was $0.6938.
The New Zealand dollar NZD=D3 edged up to $0.6530 and away from a seven-month low of $0.6514.
The blip higher came after Australian Prime Minister Scott Morrison's centre-right Liberal National Coalition pulled off a shock win in federal elections, beating the left wing Labor Party. return of a Coalition government injects greater certainty into the outlook," said Su-Lin Ong, head of Australian fixed income strategy at RBC Capital Markets. "We would expect some bounce in business confidence."
"It removes some downside risk to activity medium term and tempers our peak to trough forecast for national house prices of -15%," she added.
Labor had proposed ending some tax breaks for housing investment that could have added pressure on already sliding property prices.
The Aussie now faces a home-grown hurdle in the form of a speech by Reserve Bank of Australia (RBA) Governor Philip Lowe on Tuesday where the prospect of a rate cut is likely to be high on the agenda. this month the central bank said an easing might be needed if the labour market did not stay strong. Since then, data has showed the unemployment rate rising to 5.2% in April even as hiring beat forecasts. now expect that after last week's soft readings on the labour market the RBA will cut rates in June," said David de Garis, director of economics, markets at NAB.
"The numbers pointed to a risk that labour market spare capacity will not reduce, putting the RBA's getting back to target inflation forecast at risk," he added. "NAB expects another follow-up cut in August."
The futures market 0#YIB: implies a 62% chance of a quarter point cut in the 1.5% cash rate when the RBA board next meets on June 4. A move is almost fully priced for July and a further cut to 1 percent is baked in by December.
Yields on three-year bonds AU3YT=RR are well under the cash rate at 1.19 percent, having hit all-time lows last week.
Australian government bond futures were near record peaks, with the three-year bond contract YTTc1 steady at 98.825. The 10-year contract YTCc1 added half a tick to 98.3550.
New Zealand government bond yields 0#NZTSY= were also near historic lows after the country's central bank cut its interest rates earlier this month.
Supporting the Aussie was a statement from China's central bank on Sunday that it would maintain the stability of its yuan within a reasonable and balanced range. has been speculation China would let the yuan devalue in order to keep its exports competitive and offset some of the drag from U.S. tariffs.
Investors often use the Aussie as a liquid proxy for the yuan and sold it on Friday when the Chinese currency came under pressure amid stalled trade talks.