Australia, NZ dollars hit two-year trough as China casts a long shadow

By Wayne Cole

SYDNEY, May 13 (Reuters) – The Australian and New Zealand dollars looked set to notch another week of heavy losses on Friday, as growth forecasts for China were downgraded and the yuan extended its decline.

The Aussie was lying at $0.6870 AUD=D3, after a 1.2% drop overnight brought losses for the week to an eye-watering 2.8%. It dived as deep as $0.6829, lows not seen since June 2020, and risks a further decline to at least $0.6777.

The kiwi lurched to $0.6240 NZD=D3, having shed 2.4% for the week to as low as $0.6219. There is little in the way of chart support until the psychological $0.6000 bulwark.

It was notable that the Aussie also slid against the yen, indicating the flight to safety was spreading wider. The Aussie was at 88.26 yen AUDJPY=, having shed 2.4% overnight to a two-month low of 87.26.

Adding to the pain was China’s decision to limit unnecessary travel outside the country by its citizens, part of a drastic COVID-19 response that has hammered prices for industrial commodities.

JPMorgan this week slashed its China growth forecasts and now sees GDP contracting by an annualised 1.5% in the current quarter. It warned data on retail sales and industrial production due on Monday would show hefty falls.

The grim outlook has caused a month-long decline in the yuan and encouraged investors to sell the Aussie as a liquid proxy.

The Aussie has now lost 10% on the U.S. dollar in six weeks, a boon for local commodity exporters but a headache for the Reserve Bank of Australia (RBA) given it will only add to imported inflation.

The market 0#YIB: is fully priced for another RBA hike of 25 basis points in June to 0.6%, but it could be larger depending on what data on wages and jobs show next week.

Annual wage growth is seen picking up to a seven-year high around 2.5%, while unemployment could fall under 4.0% for the first time since the early 1970s.

“This will underscore how tight the labour market is, supporting our expectation that the acceleration in wages growth is really only just underway,” said David Plank, head of Australian economics at ANZ.

“And once higher wages growth is established, it typically takes a lot of rate hikes to bring it back down,” he added. “This sets the backdrop for our continued expectation that a cash rate of 3%+ will ultimately be required.”

The general flight to safety has been a relief for bonds with three-year bond futures YTTc1 up 25 ticks for the week to 97.080 and off a decade-low of 96.675.

(Editing by Jacqueline Wong)

((Wayne.Cole@thomsonreuters.com; 612 9171 7144; Reuters Messaging: wayne.cole.thomsonreuters.com@reuters.net))