SYDNEY/WELLINGTON: The Australian and New Zealand dollars were unable to keep hard-won gains on Wednesday as global deflation and growth concerns resurfaced, while investors braced for a batch of data out of China.
The Australian dollar eased back to $0.8689, from a peak of $0.8812 touched in a choppy session on Tuesday. Much of the weakness came from broad strength in the US dollar following disappointing data in Europe.
The Aussie has tumbled seven cents since early September, largely on the view that the US Federal Reserve is likely to raise interest rates well before most major central banks.
It could retest a four-year trough of $0.8642 set early this month if a raft of data from China, Australia's top export market, were to disappoint later in the session.
"If we see $0.8660 mark broken on a 'daily close' basis, it could open several cents to the downside before buying interest is renewed at the July 2010 low near $0.8320," said David de Ferranti, market analyst at FXCM in Sydney.
A jumbo 2037 Australian government bond issue could provide some support with talk of the order book in excess of A$10 billion. Dealers reported strong demand from international buyers, particularly Europe and Asia.
A jump in US Treasury bonds supported Australian government bond futures, with the three-year bond contract up 1 tick at 97.440. The 10-year contract added 3.5 ticks to 96.700, having matched its highest in over a year in a bullish flattening of the curve.
Ten-year Australian government cash yields edged up to 3.28 percent, having plumbed their lowest in 16 months at 3.24 percent on Tuesday.
The New Zealand dollar slipped to $0.7819, from a peak of $0.7917 touched in the previous session.
After a 12 percent sell-off in the kiwi to a 14-month low of $0.7708 hit late last month, weakness in the high-yielding currency versus the US dollar has slowed as investors turn their focus to selling it against the "safe-haven" yen as risk aversion rises.
"We're going to be in the $0.7600-$0.800 range for a few months yet, mainly because the US dollar rally is having to pause for breath," BNZ currency strategist Raiko Shareef said.
"People will need to be convinced again that the Federal Reserve will raise rates in the middle of next year before they start pushing the US dollar higher."
Shareef said the kiwi was vulnerable to near-term losses if global dairy prices continue to fall at an auction later in the day. After falling roughly 50 percent since the start of the year, a slide of 3 percent or more at the auction may trigger selling towards $0.7700.
Many in the market expect the kiwi may fall towards $0.7500 in the coming months on rising market volatility, weak global dairy prices and the possibility that New Zealand interest rates may remain on hold beyond early 2015.
New Zealand government bonds extended gains, pushing the yield on benchmark 10-year bonds to around 4.01 percent, its lowest since mid-2013.
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