THE Australian and New Zealand dollars sank to two-year lows on Tuesday as a rout in global equities shook risk assets of all stripes and worries about a slowdown in China hammered commodities. The Aussie fell another 0.2 per cent to US$0.6941, having touched its lowest since July 2020 at US$0.6911. The break of its January trough of US$0.6968 was a bearish signal that could see a retreat to a low from June 2020 at US$0.6777. The kiwi lost 0.3 per cent to US$0.6311, after hitting a fresh two-year trough of US$0.6284. The next chart supports are around US$0.6268 and US$0.6230. “Markets are downwardly revising their outlook for the global economy because of the prospects of aggressive central bank tightening and the energy supply shock brought about by the Ukraine war,” said Carol Kong, a currency strategist at CBA. This was causing heightened volatility in markets and weighing on the commodity-heavy Aussie which is often used as a proxy for global growth and the Chinese yuan. The kiwi has been faring even worse, in part because New Zealand is running a current account deficit while Australia has enjoyed a string of surpluses thanks to still high prices for iron ore, LNG and coal. “Industrial commodities have surged well ahead of the more modest strength in NZ’s agricultural export prices,” said Alan Ruskin, macro strategist at Deutsche. “Indeed, the relative terms of trade has never been so much in Australia’s favour.”

The divergence recently saw the Aussie break above NZ$1.1000 to its highest since late 2018, though it has since eased back a bit to NZ$1.0999. “That is only the fourth such break in the past six years, but we don’t see it stopping here,” added Ruskin. “Fundamental valuations suggest AUD fair value is materially higher.”

Australian domestic data on Tuesday was positive with retail sales rising a real 1.2 per cent in the first quarter, while business conditions boomed in April. The data supported the case for more rate rises from Reserve Bank of Australia (RBA), though the meltdown in global markets has seen investors trim their most aggressive wagers. Futures for August, for instance, now imply a rate of 1.37 per cent, compared to the current 0.35 per cent. A week ago that contract was implying rates would reach 1.61 per cent. REUTERS