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Australian, New Zealand dollars to chill out as Federal Reserve feels the heat

[SYDNEY] The Australian and New Zealand dollars may have finally hit bottom if analysts prove prescient in the latest Reuters poll, as bets on aggressive US policy easing bail both currencies out of a tight spot.

The Aussie is seen at US$0.6900 in one and three month's time, unchanged from the June poll, before rising to US$0.7000 in six months and US$0.7200 on a one-year horizon. It was last trading at US$0.7025.

That's a marked turnaround in fortunes for a currency that touched five-month lows of US$0.6832 in mid-June and looked set to sink a lot deeper as local interest rates were chopped.

The Reserve Bank of Australia (RBA) cut its cash rate a quarter point to 1.25 per cent in early June and followed with another easing to 1 per cent this week. The futures market also has 0.75 per cent priced in by Christmas.

Yet investors have gone even further on US rates, wagering the Federal Reserve will ease by 100 basis points in the coming year starting with at least 25 basis points this month. "With the USD now in the grip of uncertainty as to what extent the Fed is prepared to cut rates this year, then the AUD could yet enjoy an extended run into the US$0.70s," said Neil Mellor, a senior currency strategist at BNY Mellon.

He noted data from the Commodity Futures Trading Commission showed speculative short positions in the Aussie were still at very high levels, leaving the market open to a short-covering squeeze.

"The prospects of the AUD enjoying a further upleg – pending a compliant USD – does not seem unreasonable," said Mr Mellor. "Bulls may already be eyeing the post November 2018 downtrend and 200-day moving average at 71 cents."

Also offering some support has been a meteoric rise in prices for iron ore, Australia's single largest export earner. The mineral has surged 70 per cent so far this year and helped deliver a string of record trade surpluses.

It even looked possible the country enjoyed its first current account surplus since 1975 in the June quarter.

The New Zealand dollar has also benefited from the US dollar's rate troubles, steadying at US$0.6683 after bouncing from a seven-month trough of US$0.6482.

Forecasts were for it to hold at US$0.6600 right out to six months, before edging up to US$0.6700 in one year. As always, predictions ranged widely from US$0.6200 to US$0.7400.

While the Reserve Bank of New Zealand (RBNZ) cut rates to 1.50 per cent in May, it skipped a chance for further easing in June.

The market assumes it will cut again at its next meeting in August, particularly if the Fed moves, and will reach 1 per cent by early next year.

In the short term, though, all the focus is on the Fed and the kiwi is off the hook.

Ray Attrill, head of FX strategy at NAB, noted July was typically a bullish month for the currency with the kiwi having risen in 8 of the last 10 Julys.

"July is the peak northern hemisphere holiday period, typically associated with a lower volatility environment," he explained.

That in turn was good for running carry trades - borrowing in currencies with super-low rates such as the yen and euro, to invest in those with higher yields including the kiwi.