The Australian and New Zealand dollars fell to one-month lows on Monday, while bond yields surged after an upbeat US jobs report firmed up the case for a Federal Reserve interest rate increase in December. The Australian dollar fell as far as $0.7016 at one point, its lowest since early October, before steadying at $0.7040. Key support is expected at $0.7008, the 76.4 percent retracement of the $0.6892-$0.7382 climb in September and October.
The yield on the Australian two-year bond climbed to 1.93 percent, an attractive rate compared with the near zero rates of Japan and negative yields of Germany and France. Australian government bond futures were down sharply near three-month lows, with the three-year bond contract off 10 ticks at 97.950. The 10-year contract skidded 10.5 ticks to 97.0750, while the 20-year contract slipped 8.5 ticks to 96.5450. The Aussie dollar shed 1.3 percent last week. Any extension of this decline is expected to reduce the chance of another Reserve Bank of Australia interest rate cut.
Interbank futures pricing is now pointing to a sharply reduced prospect of an easing in December, implying now a mere 16 percent chance of a move compared with a 74 percent chance last week. They are, however, still fully pricing in a cut on a 12-month horizon. Disappointing Chinese trade figures released over the weekend also weighed on the Aussie. The currency is a proxy for China plays, as it is a main market for Australia's exports.
The New Zealand dollar was also bruised at $0.6520, having briefly dipped to a five-week trough below 65 cents after the US labour report. It has lost four cents since mid-October, in part due to falling prices of dairy products, the nation's largest export earner. Elias Haddad, a senior strategist at Commonwealth Bank of Australia, sees the Aussie and kiwi dollars dipping further this week with China expected to release another batch of unimpressive data.
He also forecasts the Aussie to outperform its kiwi cousin. "We expect AUD/NZD to trade modestly higher this week on a decent Australian October labour market report on Thursday," he said. Earlier in the session, Australian job ads posted their third month of growth in October, an encouraging sign that demand for labour is holding up. The Aussie held at NZ$1.0770, having bounced three cents from a low touched last week. New Zealand government bonds fell, sending yields as much as 6 basis points higher at the long end of the curve.
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