The Australian dollar slipped on Monday on risk aversion after North Korea launched another nuclear test, while the New Zealand dollar stayed near three-month lows ahead of a hotly-contested general election later this month. The Aussie stumbled to $0.7962, from Friday's high of $0.7997. The currency has been trapped in a narrow band in recent weeks, caught between waning risk appetite amid geopolitical tensions and rising commodity prices.
North Korea on Sunday conducted its sixth and most powerful nuclear test, which it said was of an advanced hydrogen bomb for a long-range missile, prompting the threat of a "massive" military response from the United States if it or its allies were threatened. Rising tensions in the region drove investors to safe harbours of yen, gold and sovereign bonds as they pared back riskier positions in carry trades which typically favour the higher-yielding Antipodeans.
"AUD tends to decline on such risk aversion because Australia runs a current account deficit, and hence is reliant on offshore financing," said Joseph Capurso, currency strategist at Commonwealth Bank of Australia. "Generous liquidity in AUD also encourages participants to express risk aversion via AUD." Against the Japanese yen, the Aussie slipped 0.5 percent. It eased nearly 1 percent in August, the most since a 1.4 percent drop in May.
Japan is the world's largest creditor nation and traders tend to assume Japanese investors would repatriate funds at times of crisis, thus pushing up the yen. At the same time, strong commodity prices have supported the Aussie. Copper hit a three-year high on Monday while Aluminium was at its highest since February 2013 and nickel carved out a nine-month peak. Higher commodity prices boost Australia's national income. Figures due on Wednesday are likely to show Australia's A$1.7 trillion economy expanded by 0.8 percent in the June quarter, picking up speed from a tepid 0.3 percent in the prior period.
Earlier, official data showed companies doled out the biggest increase in wages and salaries in two years last quarter in a promising boost to consumer spending power. Across the Tasman Sea, the Kiwi held at $0.7173 after falling to $0.7132 last week, its lowest since early June. It took a knock last week when a poll showed support for opposition Labour overtaking that of the governing National party.
A televised debate on Monday evening between the two leaders will be watched closely, as competing polls show their parties running neck-and-neck. New Zealand government bonds gained, sending yields 2.5 basis points lower at the long end of the curve. Australian government bond futures rose, with the three-year bond contract up 2 ticks at 98.020. The 10-year contract inched 1.5 ticks higher to 97.3600.