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Australia dollar off lows, vulnerable to commodity prices

Published 29/05/2017, 01:17 pm
Australia dollar off lows, vulnerable to commodity prices

By Cecile Lefort and Charlotte Greenfield

SYDNEY/WELLINGTON, May 29 (Reuters) - The Australian dollar was sidelined in quiet trading on Monday after failing to hold above chart resistance and looked vulnerable to declining iron ore prices.

Undermining the Aussie was Commodity Futures Trading Commission data showing speculators had further reduced their long Aussie positions for the week to May 23 to be a net long 2,635 contracts from 6,344 the week before. ID:nL1N1IS1G7

The Aussie has shed 3 U.S. cents since March, partly due to falling commodity prices and the euro's resurgence on upbeat economic indicators in the euro zone.

Recent kiwi strength has capped the Aussie. The Australian dollar touched a four-month lows against its kiwi neighbour earlier in the session to be last at NZ$1.0558 AUDNZD=R . It dropped 2 percent last week in the largest such decrease in more than a year.

The losses are due in part to a diverging commodity outlook with prices of iron ore, Australia's top export earner, off 27 percent DCIOcv1 since mid-April.

"It's all about the commodity plays these days and with the markets growing increasingly concerned about demand for iron ore, the Aussie could continue to struggle - more so if both the Fed and ECB point to a more hawkish shift in forward guidance," said Stephen Innes, a senior trader at OANDA.

In contrast, the outlook for New Zealand's dairy products, its largest export, is promising.

Global dairy prices have risen five times in a row in the past two months while cooperative giant Fonterra lifted its forecast milk payout for the 2016/17 last week. ID:nL4N1IP5GN

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The New Zealand dollar NZD=D4 rose over the weekend, touching a two-month high of $0.7077 before retracing slightly to trade around $0.7050 on Monday.

Investors are waiting for Wednesday's central bank financial stability report which is expected to flag ongoing risks in the housing sector, but an improved outlook for dairy.

New Zealand government bonds 0#NZTSY= eased, sending yields 3 basis points higher at the long end of the curve.

Australian government bond futures edged off six-month highs, with the three-year bond contract YTTc1 down 1 tick at 98.290. The 10-year contract YTCc1 shed half a tick to 97.5545, while the 20-year contract YXXc1 lost 1 tick to 96.9700.

The spread between Australian AU2YT=RR and U.S. US2YT=RR 2-year government bonds inched up to 29 basis points, having plumbed 28 basis points on Friday, the smallest since 2001.

Likewise, the 10-year bond spread stood at 19 basis points, from 16 basis points last week, which was the slimmest since November.

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