The Australian dollar extended hefty offshore gains on Tuesday, advancing above 71 US cents, as risk appetite got a boost after governments worldwide stepped up efforts to stop the rot in the global financial system.
Stock markets and commodities surged as the efforts helped regain investor confidence in riskier assets. Short-dated bill and bond futures lost ground as money flowed back to equities and markets trimmed expectations of hefty rate cuts in coming months.
The Australian government on Tuesday announced a $10 billion stimulus package to cushion the economy from the credit crunch, just days after Canberra offered guarantees on the country's $600 billion to $700 billion in bank deposits.
In the United States, authorities were meeting to finalise details of a government plan to buy stakes in troubled commercial banks while major European countries sought to inject public money to shore up confidence in the banking sector.
"Coordinated initiatives from European governments and ongoing efforts from US policymakers have injected confidence to markets,'' said Patrick Bennett, Asia foreign exchange and rates strategist at Societe Generale.
"Equities have rallied strongly. Safe-haven buying of the yen is being unwound. The Aussie has outperformed as risk averse positions are trimmed.''
Late today, the dollar rose to $US0.7105, up 7% from $US0.6605 late here on Monday and well off a five-and-a-half year low of $US0.6330 struck late last week.
Last week, the currency posted its biggest weekly decline since being floated in 1983, as a steadily deteriorating outlook for the global economy forced investors to aggressively unwind leveraged carry trades and positions in riskier assets.
But with governments and central banks working overtime to rescue banks and financial institutions, stock markets enjoyed some of their biggest rallies ever. That encouraged investors to return to carry trades and the Aussie jumped to 72.63 yen from 66 yen late here on Monday.
Analysts said the Australian government's latest move to provide a fiscal stimulus to the economy could hurt government bonds in the longer term and yields were likely to rise.
"The Reserve Bank of Australia (RBA) may view the extra fiscal pump-priming as negating the need for some of the forecast monetary policy easing,'' said Joshua Williamson, senior strategist at TD Securities.
"Accordingly, the markets timing and extent of easings and our forecast for a 4% RBA target cash rate may be at risk of being too low.''
Bill futures for December fell 0.150 points to 95.21 as investors trimmed chances of a hefty interest rate cut in the coming months. Investors are now betting on a 50 basis point cut next month, having trimmed expectations from 75 basis points.
Australian bond futures, especially at the shorter end, extended the previous day's losses. Three-year Australian bond futures lost 0.045 points to 95.180, while the 10-year bond contract added 0.085 points to 94.525.
The spread between three-year federal bonds and swaps, which had narrowed sharply on Monday after the government's move to guarantee bank deposits, contracted further.
"The market's reasoning is that the government's assumption of bank risks represents a relative deterioration in federal government credit quality versus swaps,'' said Damien McColough, interest rate strategist at Westpac.
Reuters
