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James Hyerczyk

The Australian and New Zealand Dollars are trading mixed early Thursday with the Aussie continuing to test multi-year highs and the Kiwi right behind it with similar price action. Both currencies are hovering near multi-year peaks as a global rush into reflation plays swung commodity prices and bond yields sharply in their favor.

At 06:51 GMT, the AUD/USD is trading .7973, up 0.0003 or +0.03% and the NZD/USD is at .7430, down 0.0016 or -0.21%.

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Australian Dollar Outlook

“For Australia, the combination of buoyant commodity prices and decent export volumes means that resource-related export receipts have been healthy,” said CBA Head of Australian Economics Gareth Aird.

“Prices are expected to remain elevated and that will generate ongoing large trade surpluses which will support the Australian Dollar.”

According to Reuters, Miners have paid out bumper taxes and dividends in Australia so turning U.S. Dollars earned into Aussie Dollars. Furthermore, the reflation trade has combined with upbeat economic data at home to fuel a major rise in bond yields well beyond that seen in the U.S.


Interest Rate Differential Favors Australia

Australian 10-year yields shot up to 1.705%, the highest since May last year and a jump of 29 basis points this week alone. The spread over Treasuries widened out to 30 basis points, from zero a couple of weeks ago.

The Reserve Bank of Australia (RBA) stepped in on Thursday to by A$3 billion of 2023 to 2024 bonds aiming to stop three-year yields rising further above its target of 0.10%.

It had limited success dragging three-year yields from a high of 0.168%.

Fed’s Powell Drives Reflation Trade

Federal Reserve Chair Jerome Powell reiterated on Tuesday and Wednesday that U.S. interest rates will remain low and the Fed will keep buying bonds to support the U.S. economy. The news pushed the U.S. Dollar lower against the Antipodean currencies.

Powell said in congressional hearings that inflation was “soft” and that the U.S. economy was “a long way from our employment and inflation goals.”

“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” he said on Tuesday.

Daily Forecast

While most of the price action will be driven by the relationship between Australian and U.S. Treasury bond yields as well as demand for riskier equities and commodities, there are some U.S. economic reports that could drive some volatility.

On the data front, initial jobless claims numbers will be released at 13:30 GMT on Thursday, with economists surveyed by Dow Jones expecting a print of 845,000. Also at 13:30 GMT, the U.S. Department of Commerce will release its second estimate for fourth-quarter GDP. It is expected to show the economy grew 4.2% versus the previously reported 4.0%.

For a look at all of today’s economic events, check out our economic calendar.

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