Australia, NZ dollars bow to trade risk, bonds bet on rate cuts

By Wayne Cole

SYDNEY, March 4 (Reuters) - The Australian and New Zealand dollars slipped on Tuesday as tit-for-tat tariffs abroad pressured trade-exposed currencies, while bonds benefited from bets a global trade war would spur more policy easing to buttress economic growth.

President Donald Trump's confirmation that U.S. tariffs on China, Mexico and Canada would go ahead was followed quickly by threats of retaliatory levies and battered stock markets.

As open economies heavily reliant on trade, this was not good news for the Antipodeans, particularly given China is their single biggest export market.

"Markets have predictably reacted badly, since this raises the risk that Trump will also follow through on his threats to impose reciprocal country-specific tariffs soon," said Paul Ashworth, chief North America economist at Capital Economics.

Australia has sought an exception to some of these proposed tariffs but with little luck as yet, while Trump has flagged possible taxes on farm imports in which Australia specialises.

The risks to growth saw the Aussie lose 0.3% to $0.6207 AUD=D3, having already fallen back from a $0.6254 top overnight. Support lies at $0.6192 and a break would reopen the way to the recent five-year trough of $0.6088.

The kiwi dollar eased to $0.5605 NZD=D3, after backing off a $0.5641 peak. It has support at $0.5587 ahead of $0.5517.

The flight from equities and wagers on policy stimulus saw three-year Australian bond futures YTTc1 spike 9 ticks to a five-month high of 96.320, breaching major resistance in the process.

Yields on 10-year bonds AU10YT=RR fell to a three-month low at 4.254, having shed 15 basis points in the past week.

The trade news swamped local data showing retail sales picked up in January, while net exports added more to economic growth than expected in the December quarter.

Minutes from the Reserve Bank of Australia's February policy meeting also sounded a hawkish note as it warned further rate cuts were far from guaranteed and an extended period at 4.10% was possible if inflation proved stubborn.

Still, it was also worried about the damage tariffs could do to the global economy, and so are investors.

Swap markets have boosted the probability of another rate cut in May to 79%, from 64% a day ago, while rates are seen reaching 3.45% by year end, 20 basis points lower than a week ago.