Australia, NZ dollars steady on yield support, yen retreat

SYDNEY: The Australian and New Zealand dollars were on steadier footing on Monday as the heightened prospect of lower US interest rates weighed on the greenback, while political uncertainty in Japan dragged on the yen.

A weak US payrolls report saw markets fully priced for a quarter point cut from the Federal Reserve next week, with a small chance of 50 basis points.

At the same time, upbeat economic news at home has diminished the chance of an easing from the Reserve Bank of Australia this month and pared back the probability of a November cut to 80% from almost 100%.

The diverging outlook saw the spread on Australian 10-year bond yields over Treasuries widen to around 20 basis points, from -20 basis points a couple of months ago.

That helped underpin the Aussie at $0.6558, having bounced 0.6% on Friday to as high as $0.6589.

Resistance is layered around $0.6600 and $0.6625, with support at $0.6482.

In Japan, the resignation of Prime Minister Shigeru Ishiba stoked speculation his successor might raise government spending, and thus already sky-high borrowing.

That helped lift the Aussie 0.6% on the yen to 97.26 , within a whisker of major resistance in the 97.30 to 97.43 zone that marks a range of peaks stretching back to January.

A break higher would be bullish for a rally to at least 99.16 yen.

The kiwi dollar held at $0.5890, after rallying 0.8% on Friday to as far as $0.5917.

The turnaround was timely as the kiwi had been testing support under $0.5900 amid expectations of more rate cuts at home.

A dovish turn by the Reserve Bank of New Zealand has led markets to almost fully price another quarter point cut to 2.75% in October, and a move to 2.5% by February.

Ross Weston, head of balance sheet management at Kiwibank, noted the speculation had widened the gap between 10-year swap rates and two-year swaps by 13 basis points over the past month to trade above 100 basis points.

“More cuts now are being interpreted as more hikes later,” he said in a note.

“The 2-year part of the curve remains relatively anchored by monetary policy expectations,” he adds.

“Combined with global fiscal concerns, this is pushing long-end yields higher and steepening curves.”