Aussie Dollar Rallies Against Peers on China Production Recovery

Australia’s dollar rallied against most of its 16 major peers after a private report showed China’s manufacturing expanded for the first time in four months, boosting trade prospects.

The currency extended a gain to a third day against its New Zealand counterpart to reach a two-week high. Australia’s 10-year bond yields climbed to the most in more than a year following advances by U.S. Treasury yields after minutes of the Federal Reserve’s July meeting showed policy makers were “broadly comfortable” with a plan to curtail bond purchases.

“China’s manufacturing data was well received, spurring a gain in the Aussie,” said Takuya Kawabata, an analyst at Research Institute Ltd. in Tokyo. “Having said that, there is still an overhang from the prospect of Fed tapering, so investors are hesitant to chase the Aussie rallies too aggressively.”

Australia’s currency gained 0.2 percent to 89.87 U.S. cents at 4:42 p.m. in Sydney after falling 2.4 percent in the previous three sessions. The Aussie added 0.2 percent to NZ$1.1456 after touching NZ$1.1483, the highest since Aug. 5. New Zealand’s dollar was little changed at 78.43 U.S. cents.

In China, a preliminary reading on the Purchasing Managers’ Index of manufacturing rose to 50.1 in August from 47.7 in July, HSBC Holdings Plc and Markit Economics said today. That exceeded the 48.2 predicted by economists in a Bloomberg News survey. China is Australia’s biggest trading partner.

Emerging Markets

The Aussie touched 89.32 earlier today, the weakest since Aug. 7, amid concern paring of Fed stimulus will cause funds to flow out of higher-yielding assets. Brazil’s real has led slumps in emerging-market currencies in the past month with a 9 percent drop, followed by the currencies of India and Indonesia.

“Historically, there has been a high correlation between emerging-market currencies and the Aussie dollar,” said Ray Attrill, the global co-head of currency strategy at National Australia Bank Ltd. in Sydney. Australia “digs up stuff and sells it to emerging markets -- that’s what Australia does best, so it makes sense that the fortunes of the currency should reside with the prospects for emerging-market growth.”

An index of Australian leading economic indicators fell 0.2 percent in June after a holding steady in May, according to a report from the New York-based Conference Board today.

Rate Bets

There is a 54 percent chance that the Reserve Bank of Australia will reduce benchmark borrowing costs again this year from a record 2.5 percent, according to data on overnight-index swaps compiled by Bloomberg. Shorter-dated notes are supported by the prospects for a rate cut and slowing domestic growth, while longer-maturity securities have been sold off along with U.S. Treasuries, steepening the so-called yield curve.

The yield on Australia’s benchmark 10-year bond jumped to 4.12 percent, the highest since April 2012, from 3.98 percent yesterday. The difference between 3-year and 10-year debt yields widened to as much as 1.28 percentage points, the most since June 2009.

“RBA easing bias intact, earnings season soft, nothing to taper,” Robert Mead, the Sydney-based money manager for Pacific Investment Management Co., which runs the world’s biggest bond fund, posted on Twitter. “Roll down steepest Aussie yield curve since 2009.”

As a bond nears maturity or “rolls down” the yield curve, it is valued at successively lower yields and higher prices. Using the strategy, the security is held for a period of time as it rises in price and is sold to realize the gain.

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