SYDNEY/WELLINGTON: The Australian dollar languished near 4-1/2-year lows on Tuesday, while the New Zealand dollar held steady in a market lacking conviction with many investors having closed their books for the year.
The Australian dollar was steady at $0.8127, having drifted in a slim $0.8122/44 range, to be not far from last week's low of $0.8087.
A break there could open the way to the May 2010 trough of $0.8066.
The Aussie has shed nearly 9 percent against the US dollar this year, dragged down by falling commodity prices, sub-par economic growth at home and diverging interest rate outlooks between the United States and Australia.
Debt futures implied a one-in-five chance of a cut in the 2.5 percent cash rate at the next Australian central bank policy review in February and were fully priced for a quarter point easing by May.
The Aussie continued to feel the pinch against its kiwi cousin.
It slipped 0.1 percent to around NZ$1.0435, its weakest since December 2005, as lingering uncertainties about Australia's economy stood in contrast with New Zealand's solid growth.
A fall below NZ$1.0421 would take the Aussie to its lowest since the Antipodean currencies were floated in the 1980s.
Joseph Capurso, a strategist at Commonwealth Bank of Australia in Sydney, sees a risk there will be a fall to parity, given thin trading conditions.
However, he expects any such move to be short-lived as he believes markets are pricing in too many rate hikes for New Zealand and too many rate cuts for Australia.
The premium offered by New Zealand two-year government bonds over Australia has climbed to a six-year peak of 137 basis points, from 84 earlier this month.
The kiwi edged up to a two-week high of $0.7799 and rose to 94.05 yen, its highest since mid-2007. It benefited from broad selling in the euro, which slipped to a 2-1/2-month low of NZ$1.5576.
Yet the kiwi is on track to end the year 5.3 percent lower against the greenback and hovers near a 2-1/2-year low of $0.7609 hit earlier this month, as investors have pared back expectations for New Zealand interest rate rises.
The kiwi saw support around $0.7757 after popping above a trendline drawn from highs hit in July and earlier this month, but near term gains may be capped by technical resistance at $0.7818, its 55-day moving average.
New Zealand government bonds rose a touch, nudging most yields a basis point lower along the curve.
Australian government bond futures rose, with the three-year bond contract up 4 ticks at 97.840.
The 10-year contract was up 3.5 ticks at 97.1600, capping a hugely bullish year that has seen it rise all the way from 95.810.
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