Compiled by Glenn Blackley,
RBC DS Global Markets, London. Tel: +44 171-653 4557
Australian bonds traded in a narrow range early in the week, with very little volume circulating as the market marked time ahead of the FOMC meeting in the US.
The resulting rally in US Treasuries underpinned a solid round of buying of Australian bonds, which grew later in the week following the release of soft capital expenditure data.
The capex report surprised the market with a weaker-than-anticipated figure, recording a 15.8% fall during the June quarter to A$9.745bn, from a revised A$11.573bn in March.
Against expectations of a 3% fall, the data confirmed the slowdown underway in the domestic economy which has been flagged for some time and is likely to temper forecasts for Wednesday's second quarter GDP figures.
Activity in the bond market was led by demand for long dated bonds, which drove yields lower across the curve, with particularly strong buying of 10 year futures as the contract hit technical levels.
Yields at the short end struggled to shake off a sluggish Australian dollar, which saw the curve flatten up, with three to 10 year spread contracting to 64bp.
The Australian dollar continued to drift lower, coming up against a combination of negative factors including wider interest rate differentials between Australia and the US, soft commodity and gold prices, concern over the current account deficit due for release on August 30, and continued strength in the Japanese yen.
Outright interest in the Australian dollar continues to wane, and the heavy attention focused on the core currencies of the US and Japan has seen a natural increase in the correlation between the A$, the US$ and the yen.
With the US$/¥ cross rate nearing ¥110/US$, the A$ drifted down towards US$0.63/A$, and amid reports of a large amount of stop-loss selling, the A$/¥ cross pushed below ¥70/A$.