SYDNEY/WELLINGTON: The Australian dollar held its ground on Tuesday, taking only a brief knock after the Reserve Bank of Australia (RBA) dropped an explicit warning of higher interest rates, while the New Zealand dollar advanced further.
The Aussie edged to $1.0620, from $1.0592 in New York. It had initially dropped a third of a cent to around $1.0610 after minutes of the RBA's July policy meeting showed it shifting toward a neutral stance on rates.
But the local dollar quickly found bids with much talk of more interest from Asian central banks diversifying their reserves.
At the same time, the different RBA tone failed to move futures markets, which had already priced in at least one cut in rates by year-end. As a result, interbank futures and bank bills remained lower after the news. The central bank has kept rates on hold in July at 4.75 percent since the last tightening in November 2010.
"The market has gotten well-ahead of the RBA in terms of pricing a more dovish scenario... There wasn't much new information," said Todd Elmer, head of G10 FX strategy Asia at Citi in Singapore.
Australian bond futures fell, with the three-year contract off 0.02 points at 95.670, and the 10-year contract down 0.005 points at 95.095.
Immediate support for the Aussie is seen at $1.0594 and resistance at $1.0680, with traders citing talk of stops above $1.0675.
In the short-term, the Australian dollar will remain vulnerable to Europe and US's debt woes. "We are wary of a correction. There is the potential for a contraction to as far as the $1.03 region," Citi's Elmer said.
On the medium-term, though, he's more positive, forecasting the local dollar to potentially exceed its 29-year peak of $1.1012 set in May. The Aussie has gained nearly 4 percent this year.
Against the kiwi, the Australian dollar remained mired near one-year lows at NZ$1.2562 on the market's outlook for diverging rates in the two countries.
Financial markets imply a total easing of 50 basis points over the next 12 months in Australia, compared with 81 bps in hikes, up from 69 bps on Monday, in New Zealand.
The New Zealand dollar marched higher to $0.8460, from $0.8439 in New York.
"The NZ dollar remains well supported by encouraging local data and expectations rate hikes from the RBNZ (Reserve Bank of NZ) will now come sooner than previously thought," said BNZ currency strategist Mike Burrowes.
The kiwi has had a firm tone, touching a 30-year high of $0.8507 last week, as a steady stream of robust data, including growth and inflation numbers, have investors picking a rate rise earlier than expected this year.
Financial markets are pricing in around a 70 percent chance of a rate rise in October, and fully priced in for December.
A clear majority of analysts in a Reuters poll expect the RBNZ a December start to the tightening cycle.
New Zealand debt was weaker with yields, which move inversely to prices, closing as much as 3 basis points higher.
Copyright Reuters, 2011
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