XM Investment Research Desk – The Australian and New Zealand currencies soared to 10-month highs on Tuesday as risk appetite made a strong return on steady oil prices. Crude oil prices rebounded sharply on Monday after starting the day 6-7% lower following the failure of major oil producers on Sunday to agree to a freeze in output.
Commodity prices have been recovering from their January/February lows, led by a rally in oil prices that was mainly driven by expectations that major oil producers such as Russia and Saudi Arabia would strike a deal to limit supply. The Thomson Reuters/Jefferies CRB index, which tracks commodity prices, has risen from a low of 155.34 back in January to around 175 currently.
Sunday’s collapse in talks threatened to derail the recovery but oil prices soon stabilized on Monday and moved higher to recoup most of the day’s losses, giving rise to risk-on sentiment. Risk appetite strengthened further today after both Brent crude and US crude futures opened firmer to extend Monday’s gains.
This helped the antipodean currencies to climb to their highest since June 2015. The aussie peaked at 0.7802 at the start of European trading before easing slightly to stand 0.5% higher at 0.7790 in mid-session. The kiwi rose more sharply and was up 1.2% at 0.7031, just shy of its intra-day high of 0.7035.
Since the start of the year, the Australian dollar has appreciated by around 7% against the greenback, boosted in part, by higher commodity prices, particularly iron ore prices, which are up 40% so far in 2016. Despite the slowing growth in China, imports of iron ore and other commodities in the country have been rising in recent months. Iron ore is one of Australia’s main exports and higher prices are positive for the economy’s terms of trade.
However, other factors have also helped the aussie to come off its multi-year lows touched in January. The Reserve Bank of Australia, while maintaining an easing bias, is likely to keep rates at 2% in the near term as the domestic economy continues to enjoy a strong services sector and decent employment growth.
The central bank also does not yet appear too significantly worried about the aussie’s recent gains. In the minutes of its April monetary policy meeting, the RBA noted that the “appreciating exchange rate could complicate progress in activity rebalancing towards the non-mining sectors of the economy”. However, without a major shift in Australia’s growth and inflation outlook, the aussie’s strength is more likely to have the effect of keeping rates lower for longer than in initiating fresh cuts.
Also contributing to the aussie’s rise is the change in outlook for US rates. Expectations on the pace of US rate hikes have been pared back following a turbulent start to the year in financial markets and ongoing weak growth in the rest of the world. The change in the US rates outlook has weakened the US dollar, giving battered commodity currencies a helping hand.
The New Zealand dollar has too benefited from the diminished Fed rate hike expectations and is up 3% so far this year against the US dollar. The kiwi’s appreciation has been more limited in comparison to its Australian counterpart as the Reserve Bank of New Zealand has cut rates once already this year (to 2.25%), adding to 2015’s four cuts of 0.25% each.
Also weighing on the kiwi are falling dairy prices (although there may be signs of prices stabilizing in April). Dairy products are New Zealand’s biggest export and the currency is vulnerable to changes in global dairy prices.