Australia dollar steady late as trade data erode earlier gains

The Australian dollar was marginally stronger in Asian trade late Thursday as support provided by stronger equities performance was eroded by a wider-than-expected blowout in the trade deficit.

The currency is now close to the middle of the recent range it has held in past weeks and is expected to tread water ahead of the release of the U.S. non-farm payrolls data for June later Thursday.

Australian bond futures have climbed despite a modest improvement in risk appetite, helped in part by weaker-than-expected building approvals data released Wednesday and dovish comments from San Francisco Federal Reserve Governor Janet Yellen highlighting the risks of deflation.

At 0605 GMT, the Australian dollar was quoted at US$0.8037, from US$0.8035 late Wednesday. Against the Japanese yen, it was quoted at Y77.69 from Y77.685.

Westpac senior currency strategist Sean Callow said payrolls data will need to be dramatically off the market consensus forecast of a jobs fall of 350,000 from 345,000 in May to sway the currency significantly in either direction.

"You've obviously got people who want to see it one way or another but we're in the middle of a range that's still massively up on where we were a couple of months ago," Callow said.

"So for the time being you have to give the credit to the optimists and say it's consolidation of a big rally."

Barring any big surprises on the data front, he expects the currency will be unlikely to crack through either US$0.7985 or US$0.8155.

While market participants are keenly focused on the employment numbers, the Institute of Supply Management's non-manufacturing index for June is also due for release and could provide some cues for foreign exchange markets.

Offsetting Australian dollar gains from the offshore session was a widening in Australia's trade gap.

Australia posted its largest trade deficit since July 2008 in May as export receipts remained in freefall, highlighting the threat of weaker economic growth in coming quarters as the global economic slowdown lashes demand for commodities.

The merchandise trade deficit widened to a seasonally-adjusted A$556 million in May, from a revised A$282 million in April, the Australian Bureau of Statistics said Thursday. Exports dropped 5% over the month, with some offset coming from a 4% fall in imports.

The Fed's Yellen's earlier comments that the recent emphasis on the risk of inflation in the media was "misplaced" helped U.S. Treasurys and domestic bonds by association in the offshore session.

The rally in Australian bond futures Thursday has also been driven by momentum trades with the three-year futures having broken through some key technical levels.

The three-year September bond futures contract rose eight ticks to 95.40 while the 10-year September bond futures contract gained 8.5 ticks to 94.605.

JPMorgan senior interest rates strategist Sally Auld said the three-year futures could move into the low 95.50s range on momentum trades.

However, she said the futures will need some significant deterioration in economic data to justify a move much beyond this level.

"I think we've changed from what used to be a 'buy on dips' environment with the possibility of more rate cuts to a 'sell on rallies'," Auld said.


Source: online.wsj.com

Publication date: 7/3/2009

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