WELLINGTON/SYDNEY: The Australian and New Zealand dollars rebounded from multi-month lows on Tuesday after recent sharp losses left the currencies overstretched, with investors cautious ahead of a Federal Reserve policy meeting.
The Australian dollar bounced to $0.9042, having been as deep as $0.8984.
That was the lowest since March and a major support level as it marks the 61.8 percent retracement of the rally from $0.8660 in January to $0.9505 in July.
The rebound came as iron ore prices rose from a five-year low, partly spurred by expectations Beijing will be forced to inject more stimulus after data confirmed a slowdown in the Chinese economy. Iron ore is Australia's top export earner.
The Aussie had tumbled four US cents in six straight sessions, with much of the pressure coming as markets priced in the risk of a more hawkish tone from the Fed at its two-day policy meeting ending on Wednesday.
"Given the extent of the sell-off in the past week, a short-term correction was on the cards," said Michael Turner, a strategist at RBC Capital Markets, seeing a period of consolidation for the currency.
"But it's hard to make a case for the Aussie going back to the mid-90s," he added. The recent drop in the Aussie should be welcomed by the Reserve Bank of Australia (RBA), which is counting on a weaker currency to help bolster the export sector.
In the minutes of its Sept. 2 policy meeting, the central bank cited the Aussie as a drag on the economy since it remained "above most estimates of its fundamental value."
The RBA also reiterated that the most prudent course was for a period of stability in rates and warned against debt-fuelled speculation in the housing market. Earlier this month, it kept its cash rate steady at a record low of 2.5 percent for a 13th straight month.
The New Zealand dollar nudged up to $0.8184, from a trough of $0.8124.
"It's going to be very tough to shake off the negative bias for kiwi, even though we've had this small bounce, the downtrend is still in place," said BNZ currency strategist Raiko Shareef.
Near-term support is seen at $0.8120 and then $0.8100, with sellers seen waiting any move through $0.8200. Shareef said the kiwi would have to sustain a rise to $0.8260 to shake off the bears, which in the current environment looked unlikely.
The first significant test for kiwi is Fonterra's regular dairy auction later Tuesday. Dairy is the country's largest export earner and prices have tumbled close to 50 percent since their peak in February, pressuring the currency. Political risk also looms ahead of an election on Saturday, with a final batch of opinion polls expected over the next couple of days.
A Reuters survey of the major polls gives the ruling centre-right National Party a substantial lead, but still needing the support of small parties to govern. New Zealand government bonds were firmer, sending yields as much as 2.5 basis points lower at the long end.
Australian government bond futures bounced from multi-month lows, with the three-year bond contract up 2 ticks at 97.130.
It had fallen as far as 97.090, a level not seen since early May. The 10-year contract added 2 ticks to 96.335.
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