Australia, New Zealand dollars bewildered by Trump trade confusion

Australian dollars are seen in an illustration photo February 8, 2018. (Reuters pic)

SYDNEY: The Australian and New Zealand dollars flatlined on Tuesday as White House officials sowed confusion about their trade intentions toward China, leaving the market in a holding pattern for now.

The Aussie was steady at $0.7411, after drawing bids around $0.7397 overnight. It had retreated from a top of $0.7443 on Tuesday on a report the Trump administration planned to restrict Chinese investment in US technology.

President Donald Trump himself later denied the report, while administration officials offered conflicting signals on exactly what was planned.

“It’s been a very messy past 24 hours or so,” said David de Garis, a senior analyst at NAB.

“Endeavouring to work out the end game and winners/losers at this point in the war of words is premature,” he added. “But trade frictions and trade access with China in focus have rightly centred some renewed selling attention on the AUD.”

Australia is a major exporter of commodities to China, which makes its economy and currency vulnerable to any threat to free trade.

The New Zealand dollar has similar weaknesses, which kept it pinned at $0.6891 after a pullback from $0.6921 on Tuesday.

The growing risk of a trade war is one reason markets have priced out much chance of a rate hike in either country for months to come.

The Reserve Bank of New Zealand is widely expected to reaffirm its steady bias in a policy review on Thursday.

Just last week the head of the Reserve Bank of Australia (RBA) again made it clear rates were heading nowhere, leading the interbank market to push a hike ever further into the future. A rise in the 1.5% cash rate is only priced as a 50-50 chance by August next year.

Bond yields have also been falling, with government 10-year paper returning 2.63% compared to 2.85% just a couple of weeks ago.

It now faces a major level on the charts in the 2.56/2.60% area where yields have bottomed out on three separate occasions this year.

For the session so far, three-year bond futures were up 1 tick at 97.895, while the 10-year contract gained half a tick to 97.3650. Yields on New Zealand government bonds were down around 2 basis points across the curve.

In contrast, short-term Australian swap rates are at their highest in over two years amid a vicious liquidity squeeze before the financial year ends on Sunday.

Exactly why rates have climbed so far is something of a mystery but if it persists it could mean short-term funding becomes more expensive for local and foreign banks in Australia.