Australian, New Zealand dollars hitch a ride on bull run in global resources

[SYDNEY] The Australian and New Zealand dollars held near 10-week highs on Tuesday, as global commodity prices extended their bull run and Australia's government prepared to hand down an expansionary budget later in the day.

The Aussie edged back to US$0.7834, after touching a top of US$0.7891 overnight. The next major bull target is the February peak just above US$0.8000, while support comes in around US$0.7825 and US$0.7790.

The kiwi dollar stood at US$0.7259, having also reached a 10-week top at US$0.7304. Its February peak is all the way up at US$0.7463, while support lies at US$0.7260 and US$0.7245.

Both were underpinned by strength in commodities, with the Aussie energised by a remarkable 10 per cent surge in iron ore prices to record highs.

The steelmaking mineral is Australia's single biggest export earner, worth A$150 billion in the year to March.

"The "melt up" in commodity prices over the last week has added significant weight to that view that the A$ remains undervalued," said Richard Franulovich, head of FX strategy at Westpac.

"We used the dip below US$0.7680 earlier last week as an opportunity to trigger our buy recommendation. Dips should now be limited into the US$0.7785 and US$0.7820 region."

The jump in iron ore to over US$200 a tonne has been a huge tax windfall for the Australian government, which had budgeted for prices of just US$55 a tonne.

That will be one reason it can announce a much smaller-than- feared budged deficit later today, though it will still be easily the largest on record.

Analysts at NAB see the 2020/21 deficit at A$150 billion (S$155.8 billion), compared to the previous projection of A$197.7 billion, and expect the 2021/22 shortfall to shrink to A$80 billion.

That in turn means the government needs to sell a lot less debt than first projected, which has been a boon for bonds.

Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle recently noted the central bank was now often buying more bonds in a week than the government was selling.

All of which has helped keep 10-year yields down at 1.65 per cent, near their lowest since early March and a slim 6 basis points above US yields.

Yields in New Zealand have not been so well behaved, with the 10-year having risen steadily for the last couple of weeks to reach 1.795 per cent.

REUTERS