Aussie dlr caps worst weekly performance since early May, NZ$ up for 6th wk

By Swati Pandey

SYDNEY/WELLINGTON, June 23 (Reuters) - The Australian dollar was set for its worst weekly performance since early May, hurt by weak commodity prices with oil at multi-month lows, while its New Zealand counterpart was on track to record its sixth straight weekly gain.

The Australian dollar AUD=D4 hovered near more than one-week lows on Friday at $0.7548. The Aussie had been on an uptrend since the beginning of June but a drop in commodity prices last week saw it falter after touching a 2-1/2-month high of $0.7636.

Oil futures were near a 10-month low on concerns over a supply glut amid falling demand. O/R

The Aussie has also been pressured by an interest rate hike in the United States this month, while the Reserve Bank of Australia (RBA) has held rates at a record low 1.50 percent since last easing in August 2016.

That has narrowed the rate differential between the two to plus 25 basis points, with some traders speculating the spread might turn negative if the U.S. Federal Reserve continued to tighten further.

"In the past, a negative Australia-U.S. interest rate differential has put considerable downward pressure on the AUD/USD exchange rate," said Richard Grace, chief currency strategist at Commonwealth Bank.

"In fact, the last time the Australia-U.S. official interest rate differential went negative, AUD/USD depreciated an initial 25 percent, and then after an eighteen-month recovery, declined another 28 percent to its April 2001 record low of 0.4776."

However, Grace expects the prospect of a negative rate differential to have limited impact on the Aussie this time around largely thanks to improvement in the country's current account deficit.

"We would be surprised if the AUD/USD fell below its December 2016 level of $0.7160 simply because there was a negative Australia-U.S. official interest rate differential. It would have to take more than that."

Others expect the Aussie to remain subdued due to concerns about financial stability risks amid runaway property prices and soaring household debt. expect little upside for the AUD in the near-term and risks remain to the downside, with the U.S. Fed becoming more aggressive in its rhetoric toward tighter policy," said Martin Arnold, forex strategist at ETF Securities in London.

Across the Tasman Sea, the New Zealand dollar NZD=D4 stood at $0.7260, building on gains the previous day after the country's central bank did not address the recent strength in the currency in its monetary policy statement on Thursday. Kiwi was set for a small 0.1 percent weekly rise.

New Zealand government bonds 0#NZTSY= gained, sending yields 3.5 basis points lower at the long end of the curve.

Australian government bond futures were mixed, with the three-year bond contract YTTc1 down 1 tick at 98.180. The 10-year contract YTCc1 was unchanged at 97.58. (Editing by Shri Navaratnam)

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