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The Australian dollar AUD/USD dropped as low as 0.6578 yesterday, a bottom not seen since May 2020, as the dollar index (DXY) continued its breakneck tear, hitting a 20-year high after the US Federal Reserve heaved interest rates higher, by another 75 basis points.
The Fed’s forecasts also have intimated a higher peak for interest rates. This can only add to central bank strain everywhere, from London to Canberra.
Investors are heading for safe haven USD – how deep are AUD and NZD squeezed?
Meanwhile President Putin’s threat on Tuesday of a Russian-Western nuclear conflgatration rose like a balloon over all markets. So where does this leave AUD and NZD?
What is your sentiment on AUD/USD?
Tough tracks
Commodity pairs, such as AUD/USD and NZD/USD depend for bulk strength on raw material and commodity market values which is a narrow base to rely on, especially in a risk-off environment.
Australia’s biggest raw material export, iron ore, currently sells at $98.65 a ton, less than half the value it was in July last year. China’s property market convulsions are well known.
Less well known is a mortgage boycott from Chinese consumers on stalled building sites – a rare display of public disgust and frustration – now thought to have spread to as many as 100 cities.
Weak PMIs
More sand being thrown between the gears for AUD is more or less a given with a rash of weak regional PMI readings en route. China’s PMIs are expected to continue tracking the on-going slide of previous months given the Covid tightening, including the tech hub of Shenzhen says ING.
"This could contribute to falls in orders, employment and business confidence, leading to the Caixin Manufacturing PMI and NBS [National Bureau of Statistics] non-manufacturing PMI falling for the fourth straight month,” says Min Joo Kang, senior ING economist, South Korea and Japan.
However, the impact for the economy could be cushioned for large-scale and state-owned firms surveyed in the NBS manufacturing PMI “as orders and input costs for these companies are stable and business sentiment is less affected, contrary to that of private companies”.
Less Chinese burn?
The new Labour Australian government was hoping for some kind of Chinese trade re-set following several belligerent years peppered by boycotts on barley and beef but relations remains on low burn.
However, Europe is shopping for new, more stable trading partners following the Russian invasion of Ukraine, despite having to manage its own tight carbon targets.
A new EU-Australia trade deal is in the offing. In the background, the Reserve Bank of Australia is set to raise interest rates in October, the likely sixth-consecutive rise though it’s 50/50 on whether it will be a 25 or 50 point climb.
Governor Philip Lowe recently told a House of Representatives’ economics committee that the period of RBA 50bp hikes was likely nearing the end.
'Common sense' rate promise
“As interest rates get higher, it’s common sense that the need for big adjustments gets smaller,” Lowe reportedly said. But the magnitude of the inflation challenge has surprised most.
New Zealand’s Deputy Reserve Bank Governor Christian Hawkesby is reportedly confident that inflation will be “significantly” lower in 12-18 months.
Weaker NZ trade balance numbers haven’t helped and NZD hit a two-and-a-half year low following the Fed update; at lunchtime today NZD was up 0.03% at 0.5864 while AUD was 0.15% higher at 0.6652. GBP/USD lifted 0.18% at 1.1313.
In short, more pain for AUD/USD, especially with the likelihood of another Fed 75bp hike in November with a further 50bp or even a fifth consecutive 75bp rise come the FOMC meeting in December.
AUD & NZD teardown: FX strategist and finance consultant at Keirstone, Francis Fabrizi
- First, Oz dollar index AXY saw considerable momentum at the start of the month. “However this was short-lived as sellers regained control around 69.0 and are now pushing price to lows last seen in 2020.
- “Similarly, the New Zealand Dollar index, ZXY is very bearish and we saw a price gap of 50 pips yesterday. I believe price will attempt to fill this gap by the end of the week, giving temporary strength to NZD. This would coincide with the bearish pullback from the 1.3650 resistance level I expect to see from AUD/NZD.
- “AUD/NZD itself has been bullish since the beginning of the year. AUD continued to show strength against NZD yesterday as we saw price break above 1.1300 and reach 1.1365.
- “I expect we will see a retest of 1.1300 support level before heading higher towards 1.1400 next week. If price falls and holds below 1.1300, I believe 1.1250 will provide the next strong support level.”
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