Australian dollar dips, traders cautiously welcome vaccine news

(Reuters) – The Australian dollar traded slightly lower against its U.S. counterpart on Tuesday while the New Zealand dollar was marginally higher, as traders weighed news about progress in the development of a coronavirus vaccine.

The Aussie was trading 0.03% lower at $0.7277 AUD=D3 on Tuesday Sydney time, having hit its highest level in two months in late intraday trading on Monday at $0.7340 after Pfizer Inc PFE.N said its experimental vaccine was more than 90% effective in preventing COVID-19.

The currency later lost some of its gains to close flat on Monday.

Pfizer’s vaccine is more than 90% effective based on initial trial results, the drugmaker said on Monday. But even if it gets regulatory approvals, mass rollouts will not happen this year.

“Perhaps the market did overreact to the vaccine, given there’s still some way to go prove that it’s safe,” said Westpac currency analyst Imre Speizer.

“What they’ve shown is that it’s reasonably effective, safety is another stage. Once the market looked into the finer print of what these results were, maybe they backed off the trade a bit.”

The New Zealand dollar was 0.18% higher to $0.6830 NZD=D3 on Tuesday, which was also lower than the intraday high of $0.6854 on Monday when traders reacted to Joe Biden’s clinching of the U.S. presidency over the weekend and the vaccine news.

The antipodean currencies had weakened in recent weeks as their central banks signalled further monetary policy easing to rescue their economies from the coronavirus crisis.

The Reserve Bank of Australia (RBA) this month cut and vowed to maintain its cash rate at 0.10% and shifted to quantitative easing (QE), while its counterpart in New Zealand is expected to announce a cheap funding facility for banks on Wednesday and cut rates below zero next year.

Australian yields had been falling after the RBA’s bond-buying announcement, but bonds were now tracking the direction of U.S. rates, which were sold off following Pfizer’s findings.

On Tuesday, ten-year Australian bond yields AU10YT=RR were 13 basis points higher at 0.91%, while three-year bonds AU3YT=RR were half a tick higher at 0.11%.

The mirroring dynamic was likely to continue while the trajectory of yields in the near term was uncertain, analysts said.

Control of the U.S. Senate won’t be known until January, and rolling out an effective vaccine to enough people is unlikely to be quick enough to prevent further restrictions on activity and movements.

“It seems likely that more stimulus – monetary and fiscal – is likely to come. With COVID-19 cases reaching new highs in the U.S., it is hard to see the services sector growing strongly in the near term,” Australia and New Zealand Banking Group strategists said.

“[But] the combination of a slowing recovery and possible lacklustre fiscal support will likely lead to the Fed providing more stimulus, most likely through more bond purchases. This should cap the upside in yields.”