WELLINGTON/SYDNEY: Australian government bonds rallied on Wednesday, tracking gains in US Treasuries while both the Australian and New Zealand dollars briefly dipped to one-week lows.
Australia's benchmark 10-year yield fell as far as 3.573 percent, from 3.655 percent on Tuesday, driving the spread over US Treasuries to 100 basis points, the tightest since August 2013.
"The lower-for-longer message from key global central bankers suggests that the appetite for yield may prove stronger and more enduring, keeping a grinding bid to this spread," said Su-Lin Ong, senior economist at RBC Capital Markets in Sydney.
Ong said it is hard to find a domestic trigger for a sustained widening in the 10-year spread in the next few months.
"The most likely driver will be higher sustained global bond yields led by the US which causes some reassessment of investment and capital flows. This remains our base case over the medium term."
Australian government bond futures led the way, with the 10-year contract hitting a one-year high of 96.425, while the three-year reached a 10-month peak at 97.310.
New Zealand government bonds also traded with a bid tone, pushing yields a couple of ticks lower along the curve. The narrowing in Australia's yield premium in turn undermined the local currency and dragged it from multi-week highs.
The Aussie was down at $0.9361, continuing to back away from an 11-week high of $0.9445 set on Monday and its 2014 peak of $0.9461 reached in April.
It touched a one-week low at $0.9354. Initial support is seen at $0.9355, the 38.2 percent retracement level of its May-June rally from $0.9210 to $0.9445.
"The Australian 10-year bond yield has steadily declined since April, which has sapped the currency's interest rate advantage over its major counterparts, and may lead to less demand for the local unit," said David de Ferranti, FXCM market analyst in Sydney.
"Additionally, the possibility that significant selling pressure remains near the 2014 high for the AUD/USD is keeping traders cautious." Against the yen, the Aussie also dipped to a one-week low at 95.27 before edging back to 95.35, down 0.1 percent on the day.
The New Zealand dollar fell as far as $0.8662 before recovering a bit of ground to last stand at $0.8675, still well off a seven-week peak of $0.8749 set on Monday.
"The New Zealand dollar is likely to remain range-bound in the near-term, with supply coming in over $0.87. However, solid demand should keep any declines minimal," ANZ analysts said in a note. Near term support for the kiwi is seen around $0.8640/50, with resistance at $0.8700.
The kiwi was a hint softer against most majors, easing to a one-week trough against the Japanese currency at 88.33 yen , while the euro edged up to a near-two week high at NZ$1.5703.
Against a trade weighed basket of currencies the kiwi was 0.4 percent lower.
However, the likelihood of another rate rise by the Reserve Bank of New Zealand next month remains a solid support for the currency.
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