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Australian, New Zealand dollars suffer setback, fundamentals still support
[SYDNEY] The Australian and New Zealand dollars nursed heavy losses on Friday as a sudden sea change in risk sentiment snapped a three-week run of sharp gains and knocked both currencies from multi-month highs.
The Aussie sagged 0.5 per cent to US$0.6820, leaving behind an 11-month peak of US$0.7069. That left it down 2.1 per cent for the week so far, though that only partly retraced the previous week's 4.4 per cent surge. Support lies around US$0.6775 and the 200-day moving average at US$0.6665.
The kiwi dollar was off 0.3 per cent on the day at US$0.6411, moving away from a five-month high of US$0.6585. It was down 1.4 per cent for the week, but again that followed a 4.8 per cent jump the week before. Support comes in around US$0.6365 and the 200-day moving average at US$0.6321.
The retracement came as global stock markets went into a spin, seemingly worried that hopes for a 'V'-shaped economic recovery may have been misplaced.
Analysts, however, were sceptical.
"With correlations across asset classes again high and major moves being put down to 'risk on' or 'risk off', they tend to flip-flop from one narrative to the other and often the narrative is fickle," said analysts at ANZ.
While this sell-off had been partly attributed to a surge in Covid-19 cases in the United States, that had been happening for a while and was hardly new, they noted.
"In reality, risk assets got here on liquidity and weak arguments and a retracement was always a possibility," they added. "It feels like the market is just looking for a scapegoat."
Still, there were fundamental supports for the Aussie that were not so transient, said Westpac chief economist Bill Evans.
One was a 25 per cent rise in the price of iron ore, Australia's single biggest export earner, amid supply disruptions in Brazil and strong demand from Chinese steel mills.
Another was Australia's success in containing the virus which has allowed most of the economy to re-open well ahead of initial projections, boosting consumer confidence.
"Accordingly we have significantly lifted our target for the AUD by year's end from US$0.68 to US$0.72," said Mr Evans. "We are still expecting a 4 cent lift in 2021, ending the year at US$0.76."
Bonds, meanwhile, have been buoyed by the promise of endless liquidity from major central banks, helping pull Australian 10-year yields down to 0.88 per cent from a top of 1.128 per cent hit just a week ago.