Australia, NZ dollars stall as US bond yields climb

[SYDNEY] The Australian and New Zealand dollars suffered a mild setback on Wednesday after a sharp, and sudden, rise in Treasury yields forced a squeeze on short US dollar positions overnight.

The Aussie had eased off to US$0.7817, from a top of US$0.7865 on Tuesday, but was finding support around US$0.7800. Likewise, the kiwi had edged down to US$0.7160, having briefly touched a three-month peak of US$0.7197 the day before.

The US dollar got a lift after yields on 10-year Treasury paper spiked above a major chart level at 2.50 per cent to hit a 10-month peak at 2.55 per cent.

The move sparked speculation that a decade-long bull run for bonds was finally at an end and US yields were set for a sustained rise, something dollar bulls have long yearned for.

While the Federal Reserve raised overnight rates last year as projected, long-term yields stayed stubbornly low and undermined the positive impact on the US currency.

Events in China also gave a boost to the US dollar after China's central bank loosed controls on its yuan, which was promptly fixed at a two-week low.

Investors often use the Aussie as a liquid proxy for China plays and some responded by shorting the Aussie in anticipation of further yuan weakness.

Yet the Aussie was not without support as commodity prices remained buoyant. Oil prices climbed to the highest since 2014, leaving Brent crude up 56 per cent from its 2017 trough.

That was a boon for Australian exports of liquefied natural gas, the price of which is tied to crude prices. Australia is well on its way to becoming the world's largest exporter of LNG, which already brings in over A$22 billion (S$23 billion) a year in revenue.

Iron ore futures have also climbed over 13 per cent in the past month to reach US$77.62, their highest since September. The mineral is Australia's single biggest earner.

In debt markets, Australian bonds tracked the losses in Treasuries with three-year bond futures down 2.5 ticks at 97.840. The 10-year contract shed 5 ticks to 97.2750.

Yields on New Zealand government bonds also rose between 3 and 5 basis points across the curve.

REUTERS