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Markets

Australia, NZ dollars hitch a ride on bull run in global resources

  • Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle recently noted the central bank was now often buying more bonds in a week than the government was selling.
Published May 11, 2021
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SYDNEY: The Australian and New Zealand dollars held near 10-week highs on Tuesday, as global commodity prices extended their bull run and Australia's government prepared to hand down an expansionary budget later in the day.

The Aussie edged back to $0.7834, after touching a top of $0.7891 overnight. The next major bull target is the February peak just above $0.8000, while support comes in around $0.7825 and $0.7790.

The kiwi dollar stood at $0.7259, having also reached a 10-week top at $0.7304. Its February peak is all the way up at $0.7463, while support lies at $0.7260 and $0.7245.

Both were underpinned by strength in commodities, with the Aussie energised by a remarkable 10% surge in iron ore prices to record highs. The steelmaking mineral is Australia's single biggest export earner, worth A$150 billion in the year to March.

"The "melt up" in commodity prices over the last week has added significant weight to that view that the A$ remains undervalued," said Richard Franulovich, head of FX strategy at Westpac.

"We used the dip below $0.7680 earlier last week as an opportunity to trigger our buy recommendation. Dips should now be limited into the $0.7785 and $0.7820 region."

The jump in iron ore to over $200 a tonne has been a huge tax windfall for the Australian government, which had budgeted for prices of just $55 a tonne.

That will be one reason it can announce a much smaller-than- feared budged deficit later today, though it will still be easily the largest on record.

Analysts at NAB see the 2020/21 deficit at A$150 billion ($117.36 billion), compared to the previous projection of A$197.7 billion, and expect the 2021/22 shortfall to shrink to A$80 billion.

That in turn means the government needs to sell a lot less debt than first projected, which has been a boon for bonds.

Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle recently noted the central bank was now often buying more bonds in a week than the government was selling.

All of which has helped keep 10-year yields down at 1.65%, near their lowest since early March and a slim 6 basis points above US yields.

Yields in New Zealand have not been so well behaved, with the 10-year having risen steadily for the last couple of weeks to reach 1.795%.

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