The Australian dollar clawed its way off eight-month lows on Thursday after an attempt on the downside fizzled out and squeezed bearish bets, giving a fillip to the New Zealand dollar. The Aussie dollar rallied to $0.8798, from $0.8728 in early trade, helped by surprisingly strong 3 percent increase in Australian building approvals.
The Aussie had already started a modest recovery overnight after the market was caught short trying to trigger stops below $0.8660, a major support level and the 2014 trough. The Aussie also gained around 0.6 percent versus the euro, pound and yen, pulling away from recent lows.
"We are in the mood where the Aussie can at least stabilise around $0.8800/20, but it is more a correction after being heavily sold," said Sean Callow, a senior currency strategist at Westpac. The Aussie has dropped more than 6 percent in the past month amid a strengthening US currency and sliding global commodity prices. A breach of $0.8660 would take it to the weakest in more than four years.
Other local data included a slightly wider-than-expected trade deficit of A$787 million. Also of note was the Reserve Bank of Australia telling a Senate inquiry that regulators were considering new steps to rein in lending for housing investment with an announcement likely by the end of the year.
The Aussie bounce cheered its New Zealand cousin, which rose to $0.7850, from $0.7785 early. The kiwi proved resilient to a further sharp fall in dairy prices overnight after a Fonterra auction showed a 7.3 percent decline. Prices have now nearly halved from their peak in February, suggesting Fonterra will be hard pressed to maintain its already reduced forecast payout of NZ$5.30/kg. Sector analysts at the ANZ and Westpac banks cut their forecasts to around NZ$4.80/90 a kilo of milk solids.
The falling trend was confirmed by the ANZ Bank's commodity price index, which fell for a seventh consecutive month in September. Yet the kiwi's decline managed to even outpace prices, resulting in a rise in local returns when measured in New Zealand dollars. Supporting the Antipodean currencies was a pause in US dollar strength after a disappointing manufacturing survey in the United States and a sharp fall in Treasury yields.
"The data wasn't enough to alter the trend of the US economy but it does raise the question whether US dollar longs have overshot themselves and where they should be at this moment," said ANZ senior currency strategist Sam Tuck. The focus was now on a looming European Central Bank (ECB) policy meeting later in the session and US non-farm payrolls on Friday. The ECB is expected to present details of a new asset-buying plan that it hopes will help revive the flagging euro zone economy. New Zealand government bonds were firmer in line with Treasuries, sending yields as much as 6 basis points lower. Likewise, Australian government bond futures jumped to one-month highs. The three-year bond contract leapt 6 ticks to 97.330, while the 10-year contract added 7 ticks to 96.545.
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