The Australian and New Zealand dollars were on the defensive on Monday as the mounting risk of an imminent hike in US interest rates steadily eroded the currencies' yield advantage over the US dollar. The Aussie was off 0.25 percent at $0.7575 and uncomfortably close to a recent one-month trough of $0.7543. The currency shed almost 1 percent last week as the US Federal Reserve surprised many by highlighting the chance of a rate hike this month.
In contrast, the Reserve Bank of Australia (RBA) has recently underlined the outlook for no change in its current record-low cash rate of 1.5 percent. The central bank holds its March policy meeting on Tuesday is considered certain to stay on hold.
Domestic data out on Monday did nothing to change the equation with retail sales bouncing a modest 0.4 percent in January as expected.
As a result the premium offered by Australian government two-year debt over its US counterpart has dwindled to just 54 basis points, the smallest since early 2006.
The New Zealand dollar fell 0.3 percent to $0.7016, and back toward six-week lows at $0.7003. New Zealand government bonds eased, sending yields 1 basis point higher at the short end of the curve.
Australian government bond futures were subdued, with the three-year bond contract off 2 ticks at 97.940. The 10-year contract was steady at 97.1650 as the yield curve flattened.
"Yield spreads continue to steadily grind in the USD's favour, hitting fresh 10-plus year highs daily amid hawkish Fed March hike signals and a steady run of strong data," said Westpac analyst Richard Franulovich.
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