Australia, New Zealand dollars recoil with commodities as Fed hike looms

The Australian and New Zealand dollars slipped on Monday as hints of progress in Russian-Ukraine talks saw global commodity prices come off the boil, while US dollar looks forward to rate hikes

The Australian and New Zealand dollars slipped on Monday as hints of progress in Russian-Ukraine talks saw global commodity prices come off the boil, while the U.S. dollar looked forward to the start of an extended cycle of rate hikes this week.
 

The Aussie was back at $0.7253, having fallen 0.9% last Friday and away from resistance at $0.7368. The retreat under the 200-day moving average of $0.7312 could put pressure on support at $0.7245.
 

The kiwi dollar fell back to $0.6780, after topping out at $0.6875 on Friday. The break under $0.6800 was bearish for a move to $0.6740.
 

The Aussie fared better on the yen as the Bank of Japan is keeping bond yields near zero and high resource prices are weakening Japan's trade account. The Aussie was near a five-month high at 85.55 yen and approaching a peak from last October at 86.74.

A rate rise from the Federal Reserve is considered a certainty this week and markets have already priced in six or seven for this year. Investors are wagering the Reserve Bank of Australia (RBA) will follow with a hike as early as June and have pushed bond yields sharply higher in anticipation.

Yields on 10-year debt were at their highest since late 2018 at 2.42%, keeping the spread over Treasuries at a fat 38 basis points.

While some commodity prices had pulled back, those for major Australian exports were still historically high with thermal coal having climbed more than 70% in the past few weeks. Iron ore has also been supported by expectations for more infrastructure spending by China.
 

With supply for many commodities constrained, Westpac has sharply revised up its forecasts for Australian resources this year.

"Given our new commodity price forecasts, fair value AUD models that do not include a subjective proxy for risk are screaming that it is heavily undervalued," said Westpac chief economist Bill Evans. "Accordingly we have lifted our AUD forecast by end 2022 from $0.73 to $0.76 above its long term average," he added. "With relatively high commodity prices through 2023, the AUD is expected to move back to $0.80."

Domestically, the main events this week are minutes of the RBA's March meeting on Tuesday and the February jobs report on Thursday which should show another solid rise in employment.