Australian, New Zealand dollars break higher after bear squeeze

[SYDNEY] The Australian and New Zealand dollars held hefty gains on Thursday as markets took a steady outlook from the Federal Reserve as a dovish signal, lowering US yields and triggering a vicious squeeze in US dollar long positions.

The Aussie was up at US$0.6877, having jumped 1 per cent overnight to a one-month peak of US$0.6889. That was the sharpest one-day gain since January and snapped stiff chart resistance around US$0.6862.

Speculators had amassed large short positions against the Aussie in recent weeks as domestic data remained soft, and many were stopped out by the speed and scale of the rally.

"It is possible AUD/USD lifts to the 200-day moving average of US$0.6912," said Richard Grace, chief currency strategist at CBA. "But at this stage, with a weak domestic economy, we believe it will find levels above US$0.6900 challenging to sustain."

The squeeze spread to yen positions, where the Aussie shot 0.8 per cent higher overnight to hit 74.61 yen.

Likewise, the kiwi had reached US$0.6584, after rising 0.6 per cent overnight to a fresh four-month top of US$0.6603. The break of resistance at US$0.6576 was a bullish turn that also forced speculative short covering.

Both currencies had already been on the rise before Fed Chair Jerome Powell jolted markets by emphasising it would take a significant and persistent acceleration in inflation for the central bank to even consider raising rates.

The Fed board had earlier indicated rates would likely stay steady for all of 2020 and trimmed projected hikes in 2021 and 2022. Long-term Treasury yields fell in response and markets are still wagering on one more cut for next year.

Australian yields lagged, narrowing the gap between 10-year yields to 64 basis points from 71 basis points a day ago. The three-year bond futures were off 0.5 ticks on Wednesday at 99.275.

The next major hurdle for markets will the UK election where exit polls should appear around 2200 GMT, which is early Friday morning in Australia.

Sterling has been rising steadily on expectations the Conservative government would win re-election with a majority and lessen the uncertainty over Brexit.

As a result, a hung parliament or a win by the hard left Labour Party would likely see the pound fall sharply.

Sterling hit its highest since mid-2016 at A$1.9385 early this week, so it has a lot of room to fall if the result surprises.

REUTERS