Australian dollar gets a break, eyes iron ore antics

[SYDNEY] The Australian and New Zealand dollars were becalmed on Tuesday amid a lull in economic data and a lack of fresh news on global trade, though action in commodities offered some distraction. The Aussie dollar was holding at US$0.6924, having stalled at resistance around US$0.6940 on Monday. Strong support lies at the recent five-month trough of US$0.6865.

The kiwi was just as sleepy at US$0.6547, after topping out at US$0.6559.

The Aussie again drew some support from a barnstorming run by Australia's biggest export earner, iron ore. Iron ore futures traded in China jumped as much as 6 per cent on Monday to a contract high equivalent to around US$111 a tonne.

Vivek Dhar, a commodities analyst at CBA, noted a squeeze on supplies had seen stocks of iron ore held at Chinese ports fall sharply in recent months.

"The chance that iron ore could breach the US$100/t barrier was always on the cards following the supply disruptions that have roiled markets this year," said Mr Dhar.

"Supply and demand factors are now aligned enough to justify that outcome for a little while longer."

The windfall to Australian miners is all the greater as the Aussie is so much weaker than the last price boom which ran roughly from 2010 to 2014. Back then the Aussie ranged between US$0.9000 to US$1.0900,

Now with the Aussie around US$0.6900, a price of US$111.00 is worth A$160 - not far from the all-time peaks seen in the heady days of 2011 when the ore topped A$180.

The boost to export earnings has already delivered three of the largest monthly trade surpluses on record and might even have gifted Australia with a current account surplus in the March quarter, the first since 1975.

Normally such strength would tend to lift the Aussie but in this case it has been offset by a sharp widening in yield spreads that favours the US dollar.

Australian 10-year paper now pays a record 77 basis points less than its US counterpart, compared to 40 basis points less at the start of the year.

Likewise, markets are almost fully priced for a rate cut from the Reserve Bank of Australia (RBA) next week, while the US Federal Reserve is seen on hold for some months yet.

Futures are also heavily tipping a further quarter-point easing by August, which would take the cash rate to 1 per cent, and a 50-50 chance of a move to 0.75 per cent next year.

The Reserve Bank of New Zealand (RBNZ) has already eased once this year, to 1.5 per cent, and some economists expect it to go again in coming months.

Yields on two-year bonds touched an all-time low of 1.325 per cent on Monday and 10-year paper trades at 54 basis points under Treasuries.

REUTERS