The Australian dollar looked vulnerable on Wednesday as investors rushed to price in an extra policy easing for next year after the country's central bank signalled there was more room to cut rates than previously thought.
The Aussie traded a shade softer at $0.6786, having briefly been as low as $0.6768 overnight. It again lagged the New Zealand dollar which held firm at $0.6425.
The market had assumed the effective floor for rates was 0.5%, but Reserve Bank of Australia (RBA) Governor Philip Lowe indicated they could fall to 0.25% before it would consider unconventional steps such as buying government bonds.
Futures reacted by rapidly pricing in the risk of two further rate cuts from the current 0.75%, as opposed to just one. An easing to 0.5% was now fully priced by May next year, while a drop to 0.25% was seen as a 30% chance by November.
All of which helped three-year bond futures climb 5 ticks to a six-week peak at 99.320, implying a yield of 0.68%.
Yields on the cash 10-year bond dropped to 1.05% and further away from the November top of 1.34%.
Markets are not nearly so bullish on New Zealand, where a single quarter-point rate cut to 0.75% is priced as, at most, a 70% probability by late next year.
As a result, Aussie 10-year yields were now 28 basis points below NZ yields, compared to 11 basis points early this month.
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