Australia, New Zealand dollars edge lower following yuan policy move

SYDNEY (Reuters) – The Australian and New Zealand dollars were lower on Monday, reversing some of the previous week’s gains as China moved to facilitate shorts on the yuan and as negotiation on a U.S. stimulus package ran into resistance.

FILE PHOTO: New Zealand and Australia one dollar coins are seen in a picture illustration taken on July 12, 2016. REUTERS/David Gray/Illustration

The offshore Chinese yuan dropped after the People’s Bank of China said it will lower the reserve requirement ratio for financial institutions when conducting some foreign exchange forwards trading.

The measure means the Chinese currency can more cheaply be bet against by market participants, analysts said, indicating the move was as aimed at curbing its strength.

The yuan’s weakness dragged down the Aussie, which is often traded as a proxy for bets on China, analysts said. The antipodean currency gapped down to $0.7206, before recovering at $0.7226 AUD=D3 in the afternoon.

“Our interpretation is that removing the reserve requirement is intended to encourage firms to hedge in order to manage currency risk,” said Khoon Goh, head of Asia Research at Australia and New Zealand Banking Corp.

“It also enhances the foreign exchange market structure by making it easier for foreign investors to hedge their onshore portfolio investments.”

The move reversed part of the risk-sensitive Aussie gains from last week, forged on the back of optimism of further fiscal measures in the United States and higher commodity prices.

“That there will be an eventual stimulus is not really in question, but its size and timing are, and the market is getting whip-sawed around with headlines around the White House’s variable position,” said Westpac Banking Corp strategists.

The New Zealand dollar likewise retreated 0.12% to $0.6663 NZD=D3, down from Friday’s $0.6671, as investors continue to expect negative interest rates following dovish statements last week from the Reserve Bank of New Zealand.

The short end of Australian government bond futures were slightly lower, with the three-year bond contract YTTc1 down 1 tick at 99.815, as traders bet the Reserve Bank of Australia will target that part of the curve next month.

The 10-year contract YTCc1 was 1 tick higher at 99.15. Across the Tasman Sea, New Zealand government bonds <0#NZTSY=> eased, sending yields close to 3 basis points higher along the long end of the curve.

Source: Read Full Article