Australian dollar slides

The Australian dollar has fallen against its US counterpart Tuesday, buying 70.91 US cents from Monday’s 71.11 US cents.

The local currency is at  79.39 Japanese yen, from 79.23 ; 62.40 euro cents, from 62.36 ; 53.57 British pence, from 53.48 and 104.16 NZ cents, from 104.04.

Last Friday, the local currency has been given a lift after a survey of Chinese manufacturing surprised on the high side.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI), released on Friday, rose to 49.9 in February, from 48.3 in January, topping expectations.

It was enough to hoist the Aussie dollar up to 71.05 US cents from a low of 70.90 US cents, though it was still down 0.4 per cent on the week.

The US currency rose overnight when data showed US economic growth beat forecasts in the December quarter, supported by strength in household consumption.

In contrast, Australian households have been reining in spending amid sluggish wage growth and sliding home prices.

CoreLogic property data out on Friday showed home prices across the country fell another 0.7 per cent in February, though that was a small improvement from January’s 1 per cent drop.

The Reserve Bank of Australia recently warned that a further significant fall in prices could undermine household wealth and spending.

The weakness in consumption is one reason analysts suspect figures for GDP out next week will indicate annual growth slowed to about 2.6 per cent last quarter.

“We expect home price falls to double to 14 per cent, peak to trough, making a negative household wealth effect on consumption likely,” said UBS economist George Tharenou.

“We expect GDP to clearly slow to a below-trend 2.3 per cent in 2019, seeing unemployment rise and the RBA cut in November, with risk of earlier easing.”

Investors have already moved to price in the risk of a cut in interest rates this year, with futures implying about an 80 per cent probability of a quarter point easing in the 1.5 per cent cash rate.

That in turn has pushed down Australian bond yields and fattened the premium offered by US debt.

Yields on Australian 10-year bonds are now 56 basis points below those on US paper, compared with 36 basis points at the start of the year.

Australian government bond futures dipped in line with Treasuries, with the three-year bond contract easing 3.5 ticks to 98.330 while the 10-year contract fell 5 ticks to 97.8550.

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