Australian dollar dips, bond yields at record lows on RBA easing

SYDNEY (Reuters) - The Australian dollar eased and bond yields hit record lows on Tuesday after the country’s central bank cut interest rates and pledged to buy longer-term debt with the aim of lowering borrowing costs across a struggling economy.

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

The Aussie dipped 0.2% to $0.7040 AUD=D3 but remained above the 15-week low of $0.6990 touched on Monday. Resistance lies at $0.7076 with a major chart barrier up at $0.7157.

The New Zealand dollar held at $0.6634 NZD=D3, up from a two-week low of $0.6590. It faces resistance at $0.6671.

Yields on Australian bonds out to five years all reached historic lows after the Reserve Bank of Australia (RBA) cut both the cash rate and its target for three-year yields by 15 basis points to 0.1%.

The central bank also extended bond purchases out to the five- to 10-year tenors, saying it planned to buy A$100 billion ($70.41 billion) of Federal and State debt over the next six months.

The RBA slightly upgraded its outlook for economic growth citing Australia’s progress in containing the coronavirus. Yet the Board still drove home the dovish message by stating it was prepared to do more on policy if necessary.

“The RBA didn’t disappoint when it cut interest rates and launched quantitative easing today,” said Marcel Thieliant, a senior economist at Capital Economics.

He noted that the RBA would likely end up holding around 16% of federal and state bonds after this round of purchases.

“This would still be fairly low by international standards,” said Thieliant. “So even though the RBA today became more optimistic about the outlook for the economy, we think there’s a good chance that QE will be extended further next year.”

Yields on three-year bonds AU3YT=RR duly ticked down to 0.11%, while five-year yields AU5YT=RR dropped to 0.26% and 10-year yields AU10YT=RR to 0.76%.

The latter remain some way above their all-time trough of 0.555%, leaving them with room to rally further.

The 10-year bond future contract YTCc1 also gained 6 ticks to 99.240.

($1 = 1.4203 Australian dollars)

Editing by Jacqueline Wong