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Freefalling Australian and New Zealand Dollars Look Set for More Pain

Freefalling Australian and New Zealand Dollars Look Set for More Pain

(Bloomberg) --

The dramatic break below 60 U.S. cents for the Australian and New Zealand dollars is an ominous sign of deeper losses as two of the last major holdouts against quantitative easing race toward it.

The Aussie plunged to 0.5933 per dollar Wednesday, the lowest since 2003, ahead of a speech on Thursday by the Reserve Bank of Australia Governor Philip Lowe that may usher in unconventional monetary policy. The kiwi touched more than a decade low of 0.5868, after its central bank slashed rates and said QE may come next.

Seen as barometers for world growth, the two currencies have already tumbled well over 10% against the dollar this year as the coronavirus pushes the international economy toward recession. A collapse in their bond yields to record lows and a scramble by global funds to sell assets for the dollar mean both may plumb new lows before the month is out.

“Measures of risk aversion have hit global financial crisis levels,” said Rodrigo Catril, a senior FX strategist at National Australia Bank Ltd. in Sydney. “If they are sustained, we are almost certainly not done with the downside on both Aussie and kiwi.”

Freefalling Australian and New Zealand Dollars Look Set for More Pain

Yields on Australian government bonds due in a decade tumbled to a record low 0.55% this month, while New Zealand’s slid to a historic 0.83% as investors sought haven assets.

Further declines are likely for the Aussie and its bond yields if Lowe cuts policy rates and announces QE, as many investors expect, on Thursday. The RBA has already said it stands ready to buy bonds to ensure liquidity in markets.

The Reserve Bank of New Zealand has already enacted an emergency rate cut of 75 basis points on Monday, and has said it may be ready to roll out QE as early as May.

Catril thinks the Kiwi may test 55 U.S. cents while the Aussie trades around the mid-to-high 50s level.

The Aussie and kiwi have also tumbled against emerging-market counterparts.

“The market just really hates the Aussie nowadays,” Marshall Gittler, a strategist at BDSwiss, wrote in a report. Gittler sees it as “the benchmark ‘risk on’ currency” and a natural target for short sellers under current conditions.

Silver Lining

While the virus lockdown means there is no prospect of drawing in tourists with the cheaper currencies, Australia’s huge iron ore producers will benefit from fatter margins.

Miners including BHP Group and Rio Tinto Group sell the steel-making ingredient in dollars and have inputs largely denominated in the local currency, meaning they’re winning about a 3% to 4% cost benefit, Ord Minnett Ltd. said in a note on Tuesday.

Lower interest rates and measures by the RBNZ will be a boon to local companies, although the benefits will be tempered by a likely recession, according to Kiwibank economists including Jarrod Kerr.

“Efforts to contain the Covid-19 pandemic are severely impacting economic activity,” Kerr wrote in a report Wednesday. “New Zealand’s small, open economy is likely to record a three-quarter recession.”

©2020 Bloomberg L.P.