WELLINGTON/SYDNEY: The Australian and New Zealand dollars held firm against the yen on Tuesday, with the kiwi within easy reach of a four-year peak, as pressure grew for the Bank of Japan to ease policy aggressively Later this week.
The Aussie bought 88.58 yen, having scaled a 19-month peak around 89.01 a day earlier, while the kiwi fetched 70.91, not far off a four-year high around 71.36 set Monday.
Responding to pressure from next Prime Minister Shinzo Abe for stronger efforts to beat deflation, the Bank of Japan will ease monetary policy this week and consider adopting a 2 percent inflation target no later than in January, sources said on Tuesday.
Risk sentiment was also supported by signs of progress in US fiscal talks. Economists have warned that going over the fiscal cliff could push the world's biggest economy into recession.
That helped the Aussie dollar hold its ground against the greenback at $1.0542, within easy reach of a three-month high of $1.0585 set last week. Support was found around $1.0485, the 23.6 percent retracement of its Oct-Dec rally.
Markets paid only passing attention to minutes of the Reserve Bank of Australia latest policy meeting, which showed the rate cut on Dec. 4 was a much closer call than the done-deal scenario many had assumed.
"Effectively the Board brought forward a potential rate cut in February to the December meeting. This means a fresh case has to be made for yet another cut in February," said Robert Henderson, chief economist markets at National Australia Bank.
"They need ongoing confirmation that the outlook for inflation remains contained to cut further."
Investors continued to factor in a 60 percent chance of a quarter point easing to 2.75 percent in February, when the central bank next meets. Markets implied the cash rate could fall to 2.5 percent or lower in 2013.
The Aussie was aided by a further rise in prices for iron ore to a five-month high of $132.20 a tonne, up no less than 52 percent from the lows touched in September. It is now back at the levels held in June before a slide sparked premature talk of an end to the mining boom.
The rally owes much to demand from China where iron ore imports were at a two-year high in November. The steel-making ingredient is Australia's biggest export earner and, if prices stay up here, it should bolster the terms of trade.
The New Zealand dollar was flat against the greenback at $0.8442, but held near a 15-month high of $0.8477 hit late last week.
The kiwi brushed off a cut in the New Zealand government's growth outlook and its announcement that it would achieve a smaller-than-forecast budget surplus in 2014/15.
Traders said bets were heavily tilted in favour of more kiwi strength, but many investors are loathe to add to these positions given illiquid markets in the year-end season .
"The market has gotten quite long on the kiwi, and that's making further upside difficult," said Tim Kelleher, head of institutional FX sales at ASB.
He said the kiwi may stumble towards $0.8360, a level where previous highs were hit in September and October, if GDP data on Thursday came in weaker than expected.
Longer-dated New Zealand government bond yields slipped after the government's fiscal update put an increased focus on inflation-linked bonds, suggesting that fewer nominal bonds would be offered in the future.
Australian government bond futures were softer, with the three-year bond contract down 0.025 points at 97.210. The 10-year contract touched a four-month low at 96.625, edging closer to the August trough of 96.560.
Center>Copyright Reuters, 2012