Australia, NZ dollars battle to extend gains as lockdowns drag

SYDNEY: The Australian and New Zealand dollars were battling to keep a rally going on Wednesday as a rebound in commodity prices and record highs for Wall Street buoyed risk sentiment, though lockdowns at home made the going difficult.

The Aussie eased back a bit to $0.7241, after two days of gains took it as high as $0.7271 but stopped short of chart resistance at $0.7290.

The kiwi dollar also faded a little to $0.6941, from a top of $0.6965, but remains well above its recent 10-month trough of $0.6807.

Firmer commodity prices help Australia, NZ dollars make tiny gains

A 9% rally in iron ore prices on Tuesday helped steady the Aussie, though Australia's biggest export earner is still far below the peaks seen in May.

Domestically the news was not so good, with New South Wales reporting another record number of COVID-19 cases and no sign of lockdowns ending in Sydney, Melbourne or Canberra.

Data on construction work for the June quarter also missed forecasts, and coronavirus restrictions will likely hamstring activity this quarter.

That combined to keep 10-year bond yields at 1.16%, just off seven-month lows and 13 basis points under comparable US yields.

"The protracted lockdowns in Sydney and Melbourne remain a key risk to the outlook with a significant hit to activity and a reversal of some of the recent gains in the labour market," warned NAB chief economist Alan Oster.

"Importantly though, with key vaccination hurdles likely to be achieved by year end, we expect activity to rebound strongly in 2022."

As a result, Oster expected the Reserve Bank of Australia (RBA) would stick with its decision to start tapering bond buying when it next meets on Sept. 7, though the decision might be a close one given the spread of the Delta variant.

Even so, he still thinks the RBA will not actually start hiking rates until 2024 given persistent weakness in wages and core inflation.

Across in New Zealand, authorities reported 62 new coronavirus cases which could lead the country to extend its national lockdown.

The restrictions have already forced the Reserve Bank of New Zealand (RBNZ) to delay a rate hike this month, though policy makers continue to argue that a move is needed to head off inflationary pressures.

Markets imply around a 71% chance of a rate rise at its next meeting on Oct. 6, and a real chance of a further hike in December.