Australia, NZ dollars surf reflation wave, bonds left drowning

SYDNEY: The Australian and New Zealand dollars hit three-year highs on Monday as optimism on global growth set a fire under commodity prices, while fears of faster inflation sent bond yields surging.

The Aussie was up at $0.7878 having crossed $0.7900 for the first time since early 2018 to reach $0.7908.

Traders said a break of the January peak at $0.7819 sparked a wave of buying by momentum funds, with the next targets being $0.7916 and $0.7988.

The kiwi dollar climbed to $0.7307, and stretched as far as $0.7338 at one stage having finally cracked the January top of $0.7314. The next target is $0.7395.

An extra fillip was provided by S&P raising its New Zealand rating a notch to AA+, citing the surprising strength of the economy and a better outlook for government finances.

Broader support came from the latest spike in industrial commodity prices, from copper to aluminium, nickel and tin.

"As well as the break above the year-to-date high exciting technically based traders, the seemingly unrelenting strength of commodity prices is doubtless a factor," said Ray Attrill, head of FX strategy at NAB.

"The rise in prices in recent days has served to push our medium term fair value estimate for AUD/USD up to 80 cents."

At the same time the tide of wagers on faster global inflation have hammered bond markets, with yields in Australia and New Zealand surging even more than for Treasuries.

Australian 10-year yields shot up 15 basis points to 1.578% which, barring a brief spike in March last year, was the highest since mid-2019.

Three-year bond futures dived 5 ticks to a five-month low of 99.725, implying a yield of 0.275%.

That was well above the Reserve Bank of Australia's (RBA) target of 0.10% and the central bank stepped in to buy A$1 billion of bonds to restrain the move in cash yields.

The spread of Australian 10-year yields over Treasuries widened out to almost 20 basis points, from zero a couple of weeks ago.

"With growth prospects improving; central banks committed to maintaining stimulus; and inflationary expectations back to more normal levels gradual net increases in bond rates can be expected," said Westpac chief economist Bill Evans.

As a result, Westpac had raised its forecast for 10-year yields to 1.9% by the end of this year, up from 1.55%, and to 2.5% by the end of 2022.