The Australian and New Zealand dollars faded from four-month highs on Tuesday as speculators took profits on short US dollar positions after several sessions of heavy selling. The Aussie edged back just a touch to $0.7955, having jumped 0.7 percent on Monday to a peak of $0.7979. The US currency has been under heavy pressure as markets price in the risk of policy tightening in other developed nations. In particular, speculation is growing the European Central Bank will start to slow its asset buying this year.
The Bank of Canada might well hike at its policy meeting on Wednesday, though the strength of its currency may act as a brake given its potential impact on exports. The Reserve Bank of Australia (RBA) has repeatedly warned that a sustained rise in the local dollar would drag on economic growth, tempering speculation about an early hike in its 1.5 percent cash rate.
The New Zealand dollar also touched a four-month high overnight at $0.7315, before edging back to $0.7287. It took a mild knock after a survey by economic think tank NZIER showed business sentiment had dropped to a two-year low in the fourth quarter on pessimism towards the country's new Labour-led government. New Zealand government bonds eased a fraction, sending yields 0.5 basis points higher along the curve.
Australian government bond futures tested recent lows, with the three-year bond contract off 3 ticks at 97.785. The 10-year contract dipped 2.5 ticks to 97.2050. The government on Tuesday launched a new 2029 benchmark bond to be sold under syndicate, which will test demand for Australian debt as spreads over US yields shrink. The last sale of longer-term paper drew solid demand, both domestically and from offshore.
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