Australian dollar strengthens

The Australian dollar has risen Friday, buying 69.16 US cents from 69.09 US cents on Thursday.

Yesterday, the local currency has slipped to a two-week trough as a mixed set of local jobs data were taken as a green light for a rate cut as soon as July, driving bond yields to historic lows.

The Aussie eased 0.3 per cent to 69.08 US cents, taking it further away from last week’s top of 70.25.

It lost a little more to the safe-haven yen, hitting a five-month low of 74.73 yen.

The drop would have been sharper but markets have already priced in an awful lot of policy easing by the Reserve Bank of Australia following its cut to 1.25 per cent earlier this month.

Investors pushed yields on three-year bonds under the psychological 1.0 per cent level for the time ever, to reach a fresh trough of 0.991 per cent.

“The market is priced for sub 1 per cent cash rates, so effectively that’s what’s driving this,” said Su-Lin Ong, head of Australian fixed income strategy at RBC Capital Markets.

“And I think the market is questioning how far below we are going.”

Futures jumped to price in a 72 per cent chance of another rate cut in July, up from 52 per cent early in the day.

They also imply a move to 0.75 per cent by December is virtually a done deal.

The trigger came when the May labour report showed unemployment stayed at 5.2 per cent when analysts had hoped for a dip back to 5.1 per cent.

While new hiring surged by a surprisingly strong 42,300 the workforce expanded by nearly as much, keeping the jobless rate stubbornly steady.

“While the RBA will welcome the strong pace of employment growth in May, today’s data confirm that there is excess capacity in the labour market,” said Ben Udy, the Australian economist for Capital Economics.

“That means that the unemployment rate would need to fall much further before inflationary pressures strengthen in earnest,” he added. “We expect that to prompt the RBA to cut rates to 0.75 per cent by the end of the year.”

One redeeming factor for the Aussie was that most other major central banks are also under pressure to ease, with markets implying no less than an 85 per cent probability of a July rate cut from the US Federal Reserve.

Indeed, the market is pricing in 100 basis points of Fed easing by the middle of next year, compared to another 50 basis points for the RBA.

Futures for Australian three-year bonds firmed 2.5 ticks to 98.985, while the 10-year contract rose 1.75 ticks to 98.5775.

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