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AUD, NZD Test Depth of Support after Sharp Weekly Reversal

SYDNEY, May 14 (Reuters) - The Australian and New Zealand dollars were nursing steep losses for the week on Friday as failures to sustain breaks to upside risked a purge of long positions by disappointed bulls.

The Aussie fell back to $0.7722, a major come-down after breaking to a 10-week high of $0.7891 at the start of the week. The weekly loss of 1.5% was also the largest since late February and risks cracking support at $0.7675, which could unleash a retreat to $0.7585.

The kiwi dollar faded to $0.7175 and away from its recent top at $0.7304. Support lies around $0.7115/20 and a break could see a retracement to $0.7000.

Both currencies have been hit by risk aversion this week as global stocks slid and a startlingly strong reading for U.S. inflation sparked speculation the Federal Reserve might have to start tapering earlier than thought.

Beijing also sounded alarms over the recent surge in iron ore prices, contributing to a sharp pullback in the commodity on Thursday after weeks of hefty gains.

The ore is Australia’s biggest export earner bringing in around A$150 billion ($116 billion) a year.

“A slowdown in Chinese credit growth also suggests that investment spending, and by extension Chinese demand for commodities, will begin to slow later this year or early next year,” noted Joseph Capurso, head of international economics at CBA.

“Nevertheless, we still see upside to AUD in coming months because we judge it is undervalued against its fundamentals.”

The spike in U.S. inflation also rippled through global bond market sending Australian 10-year yields up almost 11 basis points for the week at 1.739%. The next bear targets are 1.75% and 1.83%.

Bonds were not helped by speculation the Reserve Bank of Australia (RBA) might chose to start its tapering early given a spending-packed budget from the government this week promised to stoke already brisk economic growth.

The bank will consider its three-year bond target and purchase programme in July, though it has so far stuck to a position that rates are unlikely to rise until 2024.

“The Budget contains a lot more spending than we expected and this creates upside risk to the growth outlook, which is intentional,” said ANZ chief economist Richard Yetsenga.

“But it also increases the risk of overheating down the track. It will do little to dissuade the market from thinking RBA rate hikes will come sooner than 2024.”

$1 = 1.2940 Australian dollars

Editing by Stephen Coates

Source: Reuters

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