Australian dollar stages half-hearted bounce as RBA holds

• The Aussie climbed 0.45pc to $0.6720 and away from a four-month low of $0.6679, a modest bounce following almost three weeks of relentless selling.
• The New Zealand dollar caught a slight lift to $0.6468 , up from a two-month trough of $0.6451.
• Bond futures eased modestly in the wake of the RBA decision, with the three-year bond contract off 4 ticks at 99.380.

SYDNEY: The Australian dollar rallied on Tuesday after the country's central bank held interest rates steady and stayed upbeat on the economic outlook despite the impact of bushfires at home and the coronavirus in China.

The Aussie climbed 0.45pc to $0.6720 and away from a four-month low of $0.6679, a modest bounce following almost three weeks of relentless selling.

It also just avoided a bearish break of October's trough of $0.6670, which would have taken it to territory last seen in early 2009.

The New Zealand dollar caught a slight lift to $0.6468 , up from a two-month trough of $0.6451.

The short-covering squeeze came when the Reserve Bank of Australia (RBA) kept its cash rate at a record low of 0.75pc following the first policy meeting of the year.

Markets had priced in around a one-in-five chance of a cut given the economic damage done by a summer of raging wildfires and spreading epidemic in China.

RBA Governor Philip Lowe acknowledged both the challenges in a post-meeting statement, but argued they would only "temporarily weigh" on domestic growth.

Instead, he stuck with a forecast of 2.75pc growth this year and 3pc next, above most private forecasters.

He did reiterate that the RBA stood ready to ease again if needed, following three cuts last year, but put no time frame on it.

Markets had aggressively ramped up wagers on further cuts as the economic fallout from the coronavirus spread. Futures  still imply a 73pc chance of a quarter-point move by April, rising to 100pc by May.

Investors have also shifted sharply to price in the risk of yet a further easing, with a rate of 0.25pc indicated at a 60pc probability by November.

Yields on three-year government debt hit an all-time low of 0.553pc, well under the overnight rate.

Yields on  10-year notes have shed 48 basis points just this year to reach 0.890pc.

Bond futures eased modestly in the wake of the RBA decision, with the three-year bond contract off 4 ticks at 99.380. The 10-year contract dipped 1.5 ticks to 99.0500.

The Aussie has been under pressure as worries about Chinese demand hammered prices for Australian commodity exports including iron ore and copper, while a slide in oil promised to weigh on liquefied natural gas earnings over time.

A clamp down on travel into and out of China was also throttling the flow of tourists and students, which analysts at NAB estimate account for 0.9pc of Australia's annual gross domestic product (GDP).

"Assuming the travel ban lasts, say, two months, the disruptions would take 0.15pc off Q1 GDP, adding to the temporary effect of the bushfires, which we initially put at 0.4pc," they wrote in a note.

"This estimate likely understates the effect of the virus on Australia in that air travel is likely to be weaker across Asia."