The Australian dollar rallied for a third straight session on Wednesday as investors wagered China would take steps to support domestic growth in its trade dispute with the United States, so underpinning demand for commodities. Risk appetite was also helped by news that North and South Korea had made some progress on denuclearisation of the peninsula.
Short-term Australian bond yields hit three-month peaks as a result and the Aussie firmed 0.3 percent to $0.7240. A break of chart resistance around $0.7235 also tripped a round of stop-loss buying. The trade-exposed currency had been shorted heavily in recent weeks as a hedge against an escalation in the Sino-US dispute and investors were taking profits on those positions.
The reversal was particularly notable against the safe-haven yen where the Aussie jumped 1 percent overnight and was last trading up at 81.31. A couple of weeks ago it had been as low as 78.64 yen. The New Zealand dollar also edged up 0.18 percent to $0.6594, but was hampered by some disappointing local data.
The country's current account deficit widened by more than expected in the second quarter, suggesting some downside risk to the gross domestic product report due on Thursday. The Aussie got a lift after China's Premier Li Keqiang talked of supporting the economy, fuelling market speculation of more stimulus.
Analysts cautioned that the latest broadsides on tariffs were a risk to China's growth, but argued the implications for Australia were not so grave. "We now assume the US government will eventually apply a 25 percent tariff on all of its $500 billion-plus of imports from China," warned Joseph Capurso, a senior currency strategist at CBA. He estimated that could take around 0.4 percentage points off China's economic growth, spread over several quarters.