Aussie down, kiwi up

The Australian dollar was back on the defensive on Tuesday as its fading appeal as a higher-yielding carry currency caused a shake-out in long positions against the Japanese yen. The Aussie was stuck at $0.7606, after an attempted bounce overnight failed at $0.7645. Its New Zealand counterpart fared better at $0.6924, having rallied from $0.6854 on Monday as speculators took profits on short positions for the month end.
The Aussie suffered most against the yen, hitting a five-month low at 84.31 yen and breaking support at 84.45. The next major chart target was put at 83.68. The Aussie has slipped steadily from atop 88 yen at the start of the month, in part reflecting its diminishing yield advantage over the US dollar.
The premium paid by Australian government two-year debt over US notes has shrunk to a single basis point, from as much as 60 basis points back in September. The spread on short-term swap rates is already negative. The last time Australian yields traded under the US was in mid-2000, when the Aussie was changing hands around 63 yen. The Aussie also ran into selling against the kiwi, falling back to a five-week trough at NZ$1.0965.
New Zealand government bonds firmed in price, nudging yields down as much as 2.5 basis points. Australian government bond futures likewise gained, with the three-year bond contract up 2 ticks at 98.090. The 10-year contract rose 3 ticks to 97.4900. "We still contend that Aussie will drop through $0.7500 one side or other of year-end, driven primarily by a decisive move into negative territory for the likes of the 2-year AU-US swap rate differential," said NAB's global head of FX strategy, Ray Attrill.