August 27, 2018 / 2:53 AM / 25 days ago

Australian dollar consolidates rally as political scare passes

SYDNEY/WELLINGTON (Reuters) - The Australian and New Zealand dollars held firm on Monday after the passing of political uncertainty at home combined with a recovery in risk appetite globally to recoup recent losses.

FILE PHOTO: Australian dollars are seen in an illustration photo February 8, 2018. REUTERS/Daniel Munoz

The Aussie dollar hovered at $0.7326 having bounced 1 percent on Friday from a trough of $0.7238. It faces stiff resistance at last week’s top of $0.7333.

The kiwi dollar stood at $0.6685 after climbing from a low of $0.6620 on Friday. Resistance now lies around $0.6720.

The Aussie had taken a spill late last week when turmoil in the ruling Liberal Party saw Prime Minster Malcolm Turnbull ousted and replaced by Treasurer Scott Morrison.

“It is hard to avoid the conclusion that we have seen a rare instance of the Aussie carrying a small political risk premium,” said Westpac senior currency strategist Sean Callow.

“But history argues for this effect to be short-lived,” he added. “Investors seem to follow the reasonable assumption that commodity prices and yield differentials are the key drivers of the Aussie, regardless of which party or which prime minister is in power in Canberra.”

Aiding Aussie sentiment was Beijing’s latest effort to stabilise the yuan, which saw the currency fixed higher on Monday.

Recent weakness in the yuan has pressured other emerging market currencies and commodity prices, spilling over into the resource-sensitive Aussie.

Helping risk appetite globally were comments from Federal Reserve Chairman Jerome Powell on Friday that the economy was not overheating and inflation expectations were well anchored.

Investors took that to mean there was less risk the Fed would turn more aggressive with its rate hikes, which nudged down longer-term Treasury yields and undermined the U.S. dollar.

That gave a lift to the kiwi as well as the Aussie.

“We mentioned last week that we were not convinced that broad USD strength would persist, and we have a little more confidence in that view following Powell’s more ‘neutral’ comments,” said Sharon Zollner, ANZ chief economist in a research note.

“That doesn’t make us bullish on the NZD; it’s just that the path lower over the medium term will be more measured.”

New Zealand government bonds <0#NZTSY=> gained, sending yields 1 basis point lower at the long end of the curve.

Australian government bond futures edged back after reaching their highest for the year so far last week. The three-year bond contract eased 1.5 ticks to 97.955, while the 10-year contract dipped 1 tick to 97.4550.

Editing by Eric Meijer

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