Aussie Holds Gain Versus Dollar as Yellen Hints at Later Taper

Australia’s dollar held its first gain in five days as Federal Reserve chairman nominee Janet Yellen said the U.S. economy must improve before policy makers can pare stimulus that has buoyed asset prices around the world.

The Aussie rallied yesterday from an eight-week low before Yellen testifies at her nomination hearing today in Washington. Implied volatility in the currency fell the most in 10 weeks as benchmark 10-year bond yields retreated from the highest since March 2012. The New Zealand dollar maintained gains after rebounding from an eight-week low versus the U.S. currency.

“The U.S. dollar has broadly weakened since Yellen’s prepared remarks came out, and the Aussie move has been a by-product of that,” said Michael Turner, a debt and currency strategist at Royal Bank of Canada in Sydney. “We suspect Aussie is going to go higher, and part of that is the fact that we don’t think tapering is going to happen until the first quarter, whereas expectations have kind of drifted more towards January.”

The Australian dollar was little changed at 93.59 U.S. cents as of 10:38 a.m. in Sydney from yesterday, when it rose 0.6 percent. The New Zealand dollar was little changed at 82.86 U.S. cents from 82.89 yesterday.

One-month implied volatility in the Aussie versus the greenback fell nine basis points, or 0.09 percentage point, to 8.92 percent, extending yesterday’s 91-basis-point drop. Australian 10-year government bond yields declined nine basis points to 4.17 percent.

In three pages of prepared remarks, Yellen said unemployment is “still too high, reflecting a labor market and economy performing far short of their potential.”

The Fed will pare its bond-buying program to $70 billion at its March 18-19 meeting from the current pace of $85 billion, according to the median of 32 economist estimates in a Bloomberg News survey on Nov. 8.

“These comments are dovish enough to suggest tapering isn’t probably going to happen in the very near term,” RBC’s Turner said.

To contact the reporter on this story: Kevin Buckland in Tokyo at kbuckland1@bloomberg.net

To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net

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