SYDNEY (Reuters) - The Australian and New Zealand dollars were on the back foot on Tuesday as their U.S. counterpart continued to benefit from the trade truce with Mexico, even as Washington kept up the war of words with China.
The Aussie was pinned at $0.6956, having lost 0.6% on Monday in the wake of the trade truce with Mexico. It had reached as high as $0.7025 at one stage before retreating.
The kiwi eased to $0.6599, after shedding 0.8% on Monday in a pullback from a $0.6681 top.
President Donald Trump's decision not to impose tariffs on Mexico was taken as lessening the risk of recession in the United States and lifted 10-year Treasury yields up to 2.15% from a 2-month low of 2.05%.
It also led investors to trim expectations for interest rates cuts from the Federal Reserve, though futures are still wagering heavily on a move in July.
Trump did not sound so conciliatory towards China, however, threatening another round of tariffs if no progress was made on trade at a Group of 20 summit later this month.
China is Australia's single largest export market and investors use the Aussie as a liquid proxy for positions on its economic outlook.
The Aussie has troubles of its own as a survey of Australian business showed activity faltered in May even as confidence got a rare boost.
The Reserve Bank of Australia (RBA) has already cut interest rates to a record low of 1.25% and markets imply around an 86% probability of a further reduction by August.
"Today's survey again suggests increased risk that the unemployment rate will not make the further gains the RBA expects and strongly argues the case for further near-term easing in monetary policy," said Ivan Colhoun, NAB's chief economist, markets.
"A weak outcome for unemployment would likely cement a July cut," he added, referring to the official jobs report for May which is due on Thursday.
Median forecasts are that employment rose a solid 17,500 in May, nudging the jobless rate down a tick to 5.1% - an outcome that would likely lessen the urgency for a rate cut as early as July.
Australian government bond futures were lower on Tuesday as risk appetite globally got a boost from the U.S.-Mexico trade news. The three-year bond contract fell 2.5 ticks to 98.920, while the 10-year contract slipped 3 ticks to 98.5100.
New Zealand government bonds were little changed.
(Editing by Shri Navaratnam)
