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New Zealand dollar on defensive

Reuters logo Reuters 5 days ago Wayne Cole and Ana Nicolaci da Costa

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The Australian dollar skidded to a four-month trough on Wednesday as a surprisingly weak reading on wages threatened to keep inflation, and thus interest rates, lower for even longer than currently priced in.

The Aussie shed 0.6 percent to $0.7580 (AUD=D4), leaving behind chart support at $0.7625/30 and putting at risk the next technical bulwarks at $0.7570 and $0.7535. Against the euro, it struck its lowest point since mid-2016 (EURAUD=).

The sell-off came after data showed wages rose only 0.5 percent in the third quarter and 2.0 percent for the year, well short of forecasts of 0.7 percent and 2.2 percent, respectively.

That augured ill for consumer spending and posed a challenge to the Reserve Bank of Australia (RBA) view that wages would ultimately pick up as the labour market tightened.

"The soft result would come as a surprise to the market and the RBA, and portends a continuation of the subdued wages environment," said Westpac economist Simon Murray.

"We see the risk that wages growth remains weak, while the RBA is more optimistic, looking for a gradual pick-up."

Markets responded by further trimming the probability of a rate rise next year (0#YBA:) with a hike not fully priced in until early 2019.

Investors piled into Australian bonds and drove yields on two-year paper down 6 basis points to 1.795 percent (AU2YT=RR).

That, in turn, shrank the premium offered over U.S. debt to just 11 basis points, the smallest since late 2000 and down from as much as 60 basis points in September - when the Aussie topped out above 81 U.S. cents.

Australian government bond futures broke four sessions of losses to rebound sharply. The three-year contract (YTTc1) added 6 ticks to 98.050, while the 10-year contract (YTCc1) firmed 6.5 ticks to 97.3900.

In New Zealand, the kiwi dollar was holding at $0.6872 (NZD=D4), having hit a two-week low of $0.6844 overnight.

The currency has been pressured by wagers the country's new Labour government would loosen the Reserve Bank of New Zealand's strict inflation target.

"I think it's speculation about what you might get in the policy targets and the new way the RBNZ monetary policy is governed, which might have a more dovish implication than otherwise," Westpac currency analyst Imre Speizer.

Finance Minister Grant Robertson told Reuters last week that the new RBNZ governor needed to be ready to embrace and employment goal in its mandate, and he would reject any candidate that was not the "right person".

New Zealand government bonds (0#NZTSY=) followed Australian debt higher in price, pushing yields as much as 5 basis points lower.

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