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Aussie Dollar Volatility Nearing 18-Month High on China Concern

The Australian dollar swung between gains and losses against its U.S. counterpart, with the currency pair’s volatility near the most in 1 1/2 years, as a cash squeeze in China roiled demand for higher-yielding assets.

The Aussie struggled to sustain a two-day rally as China’s central bank signaled it will keep efforts to curb credit growth and the nation’s shares sank into a bear market. Australia’s government bonds rebounded after Federal Reserve Bank of Dallas President Richard Fisher said investors shouldn’t overreact to the U.S. central bank’s plan to slow bond purchases.

“Volatility in a lot of asset classes is here to stay,” said Jonathan Cavenagh, a strategist at Westpac Banking Corp. in Singapore. “Commentary from the likes of Fisher provided some relief for the Aussie, but the market is still going to be focused on the China issue, and that’s still looking quite downbeat. We’re still looking to sell into rallies back up toward 93.50 and 94 cents.”

The Aussie dollar rose 0.1 percent to 92.55 U.S. cents as of 5 p.m. in Sydney, after earlier dropping by as much as 0.6 percent. Yesterday it touched 91.48, the lowest since September 2010, before rallying 0.3 percent. The currency pair’s one-month implied volatility held at 15.3 percent from yesterday, when it reached 15.5 percent, the highest since December 2011.

New Zealand’s kiwi dollar was little changed at 77.48 U.S. cents from yesterday, when it touched 76.84, the weakest level since June 2012.

The yield on Australia’s 10-year government bond fell 24 basis points to 3.80 percent, the biggest drop since August 2011. The benchmark rate reached 4.04 percent yesterday, the highest since April 2012. The three-year rate fell 12 basis points to 2.87 percent.

China Concern

The CSI 300 Index of China’s biggest companies fell 0.8 percent, paring an earlier plunge of as much as 6.8 percent, as investors speculated the government will take steps to bolster the market. The gauge slid 6.3 percent plunge yesterday, taking its drop from this year’s high to more than 20 percent.

Goldman Sachs Group Inc. and China International Capital Corp. joined banks from Barclays Plc to HSBC Holdings Plc in paring growth projections for China this year to 7.4 percent, below the government’s 7.5 percent goal. The cuts followed a tightening in central bank liquidity that yesterday left the overnight repurchase rate more than double the year’s average.

“Some of the recent pressure on the Aussie does seem to reflect market concern on the tighter liquidity in China,” said Todd Elmer, a currency strategist in Singapore at Citigroup Inc. “I expect that to remain a negative factor for Aussie.”

China is the biggest trading partner for both Australia and New Zealand.

‘Dialing Back’

Fed Chairman Ben S. Bernanke signaled on June 19 the Fed may “moderate” its $85 billion in monthly bond purchases, known as quantitative easing, later this year and end it mid-2014 if economic improvement continues.

U.S. durable-goods orders probably increased 3 percent in May after rising a revised 3.5 percent the previous month, according to the median estimate of economists surveyed by Bloomberg News before the Commerce Department report today.

The S&P/Case-Shiller index of home values for 20 cities climbed 10.6 percent for the year ended April after a 10.9 percent gain in March that was the biggest since 2006, a separate survey showed.

“What we’re talking about here is dialing back,” Dallas Fed President Fisher said in London yesterday of the central bank’s stimulus program. “The word ‘exit’ is not appropriate here,” he said.

Aussie ‘Handbrake’

Australia’s dollar has fallen 11 percent in the past three months, the worst performer tracked by Bloomberg Correlation-Weighted Currency indexes. The kiwi dollar sank 5.7 percent, the second-biggest loser.

Australian Treasurer Wayne Swan said today that the Aussie “is still putting handbrake” on some industries, even as it weakened below parity to the greenback.

“It’s good to see the Australian dollar depreciating, as it should as our terms of trade weaken and as the U.S. begins the very long journey back to normal monetary policy settings,” Swan said in Canberra.

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