SYDNEY: The Australian and New Zealand dollars were deep under water on Tuesday as concerns about the impact of coronavirus lockdowns on Chinese demand sank commodity prices and risk trades in general.
The Aussie was lying at $0.7185, having hit a two-month low of $0.7135 overnight when a break of its 200-day moving average at $0.7294 triggered stop-loss selling.
It has now shed 2.6% in just two sessions and risks a further retracement to support around $0.7086/95. The kiwi dollar was huddled at $0.6623, after touching a three-month trough of $0.6584 overnight. It is down 4.5% for the month so far and risks breaking its January low of $0.6531.
Both were undermined by sharp falls in commodity prices with iron ore - Australia’s biggest export earner - particularly hard hit as China accounts for 70%-75% of the world’s imports of the steel-making ingredient.
Australia, NZ dollars left lagging in the race to higher rates
“Iron ore demand face immediate headwinds from potential lockdown extensions in Tangshan,” noted CBA analyst Vivek Dhar. “The city is a major steel-making hub, accounting for around 14% of China’s crude steel output.”
A sharp decline in the Chinese yuan added to the pressure as investors often use the Antipodean currencies as liquid proxies for the Asian currency.
The Aussie will also be tested by local data when consumer prices for the first quarter are released on Wednesday, with markets braced for a red-hot report.
The Reserve Bank of Australia’s (RBA) preferred measure of core inflation - the trimmed mean - is seen jumping 1.2% in the quarter taking annual inflation to 3.4%.
That would be the highest reading since mid-2009 and take inflation above the RBA’s 2%-3% target band, ending years of undershooting and making it hard to justify keeping interest rates at emergency lows of 0.1%.
“At the RBA’s May 3 meeting we expect the Board will adopt a clear tightening bias in anticipation of a move in June,” said Westpac chief economist Bill Evans, who now expects the central bank to hike to 0.5% in June, rather than to 0.25%.
Futures for some time have been more than fully priced for a move to 0.25% in June and are now odds-on for a whole hike to 0.5%.
The market also sees rates reaching at least 2.25% by year end, which would be one of the most aggressive tightening cycles on record if it comes about.
Evans sees rates at 1.5% by Christmas and peaking at 2% in the middle of next year.