Australia, NZ dollars burst higher as commodities, yields combine

SYDNEY: The Australian and New Zealand dollars were flying high on Wednesday as surging bond yields and expectations for a protracted boom in commodity prices lifted the Aussie to a six-year peak on the Japanese yen.

The Aussie was taking a bow at a five-month high of $0.7471 AUD, having vaulted 0.9% overnight to shatter its previous top for the year at $0.7440. Support lies at $0.7375/80 with resistance at $0.7516 and the October peak of $0.7555.

The kiwi reached its highest in four months at $0.6971 NZD, after jumping 1.1% overnight to clear its 2022 top of $0.6926. It also breached the 200-day moving average at $0.6913, opening the way to the next chart target at $0.7080.

Both were helped by hefty buying against the low-yielding yen, with the Aussie surging 2% overnight to its highest since late 2015 at 90.64 yen. It has now climbed eight yen in as many sessions.

The gains come as markets price in the risk of an extended conflict in Ukraine and ever-tighter sanctions on Russia, leading to a prolonged rise in commodity prices.

Fitch, for instance, has markedly lifted its forecasts for a range of energy and metals resources that Australia exports. Its 2022 estimate for coking coal alone almost doubled to $300 per tonne, while thermal coal rose to $220 from just $95.

That is a huge windfall for Australian export earnings, but a major drag for Japan which is a net importer of resources.

“We expect further upside to AUD/USD, though it is likely to face resistance at $0.7516 in the near term.”

He also noted measures of implied volatility in currencies, bonds and equities has eased back below prewar levels, which was a positive for a carry currency like the Aussie.

While Japan is holding its yields around zero, Australian 10-year yields have surged 60 basis points so far this month to the highest since late 2018 at 2.82%. Markets have also turned much more hawkish on the Reserve Bank of Australia (RBA), pricing in a real risk it might hike by 50 basis points at its June meeting and that rates could reach 1.5% by year end.