Australia, NZ dollars veer dangerously close to 2021 lows

SYDNEY: The Australian and New Zealand dollars were perilously close to their 2021 lows on Friday as the risk of pre-emptive rate hikes from the Federal Reserve threatened the global reflation trade and boosted their US counterpart.

The Aussie was hanging on grimly at $0.7558, having slid 0.8% overnight. That brought losses for the week to a stinging 1.9% and left it sitting right on the 200-day moving average at $0.7553.

Bears were now eyeing the April low of $0.7532, where a break could unleash a move back to at least $0.7415.

Likewise, the kiwi backtracked to $0.7011 and further away from the week's top at $0.7159. It has shed 1.6% for the week so far in its worst performance since mid-March.

The retreat breached the 200-day moving average at $0.7040 and risks a test of the year trough at $0.6945. A break there would be very bearish, opening the way to lows from late last year around $0.6500.

This setback has been a major disappointment to analysts at local banks who have been doggedly bullish on both currencies because of the strength of global commodity prices.

In the past, the Aussie and kiwi have tended to track their countries' terms of trade, which are very high at the moment, but the correlation seems to have broken down.

Even eye-popping reports on Australian jobs and New Zealand GDP out on Thursday could not stop the rot.

"We remain of the view that the A$ is super cheap to fair value with iron ore and coal markets up overnight - met coal made fresh 2-year highs - and employment data super strong," said Richard Franulovich, head of FX strategy at Westpac.

"Our assumption has been that the 200-dma at $0.7550 would hold," he added. "So a deeper correction through that level means that our stop at $0.7525 would be hit even if the A$ is very cheap to fundamentals."

The kiwi has one advantage in that the Reserve Bank of New Zealand (RBNZ) recently shifted to projecting rate hikes as early as the third quarter of next year.

The Reserve Bank of Australia (RBA), however, has stuck to a very dovish script with a first hike still not seen until 2024.

The market increasingly suspects the bank will have to move sooner given the strength of the economy, and a hike is being priced in for late 2022.

November interbank futures have tumbled 10 basis points to 99.740, implying a cash rate of 0.26% compared to the current 0.1%.