Australia, NZ dollars on the defensive as markets eye Fed meeting

SYDNEY: The Australian and New Zealand dollars traded cautiously on Tuesday as traders waited for guidance on whether the Federal Reserve will start tapering its monetary support, while COVID-19 outbreaks also hurt sentiment.

The Australian dollar was 0.09% lower at $0.7375 in a quiet trading session. Investors were reluctant to place big bets ahead of this week's Fed meeting, which is expected to provide clues on the US monetary policy outlook.

Trade in the Australian dollar has also been overshadowed by rising COVID-19 cases at home, which some worry could lead to further restrictions and derail the country's economic recovery.

Dollar loiters near highs as traders await Fed

"The Covid-19 situation in Australia will remain a firm headwind to AUD in the near term," Commonwealth Bank of Australia strategists said in a note.

The state of New South Wales said on Tuesday daily new coronavirus cases spiked to a 16-month peak, threatening stricter or an extension to lockdown restrictions in the most populous state.

The Aussie kept within its July trading range of between $0.7599 and $0.7289. Immediate resistance lies at the $0.74 level, with support around $0.73.

The New Zealand dollar was 0.13% lower at $0.06988.

While the antipodean currency is backed by a strong economy and a hawkish central bank, recent strength in the US dollar and concerns about rising global COVID-19 infections have kept the kiwi range-bound over the last month.

New Zealand's central bank in July announced a halt to its pandemic-induced quantitative easing programme.

Westpac analysts see fair value for the New Zealand dollar at $0.74 -- a level it last reached in February.

"The delta variant continues to dominate our client discussions, and markets are pricing in a pessimistic view given reflation trade underperformance," JPMorgan strategists said in a research note.

Yields on Australian 10-year benchmark government debt rose one basis point to 1.20%. New Zealand bonds were also slightly lower on the day, with yields on the longer part of the curve rising by 2 to 3 basis points.