Australia, NZ dollars caught in cross currents as Trump causes waves

By Wayne Cole

SYDNEY, Aug 26 (Reuters) - The Australian and New Zealand dollars were left hesitant on Tuesday as a looming threat to the independence of the U.S. Federal Reserve unsettled the greenback, overshadowing a dovish update on domestic interest rates.

Markets were taken by surprise when President Donald Trump said he was firing Fed Governor Lisa Cook over alleged improprieties in obtaining mortgage loans, just the latest of his attacks against the central bank.

The move pushed up longer-term Treasury yields as investors worried that political pressure to cut cash rates aggressively would stoke inflation over time.

While the news nudged the greenback down on some safe haven currencies, it also shook risk appetite globally, which tends to pressure the trade-exposed Antipodean currencies.

That left the Aussie a fraction lower on the day at $0.6476 AUD=D3, having already eased off a top of $0.6523 overnight. Support lies around $0.6470 and $0.6415.

The kiwi dollar dipped 0.2% to $0.5835 NZD=D3, and away from resistance at $0.5876. The pullback risks a re-test of its recent five-month low at $0.5800.

The Fed news saw Australian 10-year bond yields AU10YT=RR edge up 2 basis points to 4.307%. The short end was supported by minutes of the Reserve Bank of Australia's last policy meeting which underlined the likelihood of further rate cuts.

The central bank lowered its cash rate a quarter point to 3.60% earlier this month and discussed scenarios where future easing could be gradual or might need to be sped up.

"We view the Minutes as having a clear dovish bias," said Andrew Boak, an economist at Goldman Sachs. "Our base case is the RBA maintains a quarterly pace for rates cuts in November and February – down to a 3.1% terminal rate."

"However, we view the balance of risks to this forecast as skewed to the downside, with even a modest upside surprise in the unemployment rate likely to catalyze a faster easing cycle over the coming months."

Markets imply around a 35% chance the RBA may ease as soon as September, but are fully priced for a cut at the November 4 board meeting. Rates are seen bottoming at 3.10%, with a one-in-three chance of reaching 2.85%. 0#AUDIRPR