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Australia dollar subdued by China jitters, Sydney lockdown extension

07/28/2021 | 12:02am EDT

SYDNEY, July 28 (Reuters) - Australia's 10-year government bonds hit a five-month high on Wednesday while the risk-sensitive Aussie dollar stayed low as a plunge in Chinese equity markets sent investors scurrying for perceived safe haven assets.

Yields on Australian 10-year bonds went as low as 1.164%, a level not seen since Feb. 1.

Three-year yields eased to a one-week trough of 0.239% from a high of nearly 0.5% in June as investors pushed back expectations for interest rate hikes amid rising COVID-19 cases in the most populous city of Sydney.

The Australian dollar, a liquid proxy for the Chinese yuan, was last at $0.7367, not far from last week's eight-month low of $0.7289.

The yuan teetered near a three-month low at 6.5180 per dollar after logging its worst day since October on Tuesday on investors' concerns about tightening government regulation. On Wednesday, it hovered around 6.5030 as state-run financial media called for calm.

Also clouding the outlook for the Aussie was a four-week extension of a coronavirus lockdown in Sydney, raising prospects of a third-quarter economic contraction and higher unemployment.

Fitch Solutions on Wednesday downgraded its 2021 forecast for the Australian dollar to $0.7500 from a previous estimate of 0.7600 "amid rising risks to the growth outlook emerging from a resurgence in the Covid-19 domestic outbreak."

All eyes will next be on the U.S. Federal Reserve which will announce its policy decision at 1800 GMT followed by a news conference at 1830 GMT.

The New Zealand dollar held at $0.6959, after hit an eight-month low of $0.6882 last week.

New Zealand government bonds gained, sending yields about 2.5-3.5 basis points lower across the yield curve.

Australian government bond futures rose, with the three-year bond contract up 1.5 ticks at 99.715. The 10-year contract added 4 ticks to 98.835. (Editing by Kim Coghill)

ę Reuters 2021
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