Australia, NZ dollars swept up with commodities, euro rout

SYDNEY: The Australian and New Zealand dollars were both at four-month highs on Monday courtesy of a massive rally in commodity prices and a slump in the euro to its lowest since 2017.

The Aussie was all the way up at $0.7404, having climbed 1.9% last week and finally cracked the January peak of $0.7314. It also topped the 200-day moving average at $0.7323 in a bullish technical break that clears the way to $0.7480.

The kiwi dollar added 0.5% to reach $0.6895, after clearing a January top of $0.6890, with $0.6976 the next target.

The euro slid another 1% to A$1.4663, having tumbled 4.8% last week in its worst performance since early 2009. The next major level is a trough from July 2017 at A$1.4417.

"With met and thermal coal, LNG/natural gas and aluminium all at record highs, copper closing above $10,500 for the second time ever plus iron ore up 14% last week, the commodity complex remains a huge source of support for the A$," said Richard Franulovich, head of FX strategy at Westpac.

"However, the increasingly 'stagflationary' outlook for Europe and the US is hardly a positive backdrop in the months ahead."

While Australia is a net energy exporter, it imports most of its oil leading to record prices for petrol which is spilling over into other costs.

Diana Mousina, a senior economist at AMP Capital, warned higher energy costs coupled with the inflationary impact of floods in Australia would add around 0.5 percentage points to March quarter consumer prices.

That would see annual CPI top 5%, with the core measure up around 4% by mid-year.

"We now expect the first rate hike in June, previously August, as March quarter inflation and wages data is likely to be much higher than the RBA anticipates," Mousina said.

"After June, we expect two more rate hikes in August and November, leaving the cash rate at 0.75% by the end of the year."

RBA Governor Philip Lowe is due to give a speech on Wednesday where he will likely expand on their latest thinking on inflation and wages.

Markets imply around an 80% chance of a hike to 0.25% in June, with a move fully priced in for July.

Rates are seen between 1.0% and 1.25% by year end.