Australian dlr heads for best month in 4 years as risk revives

© Reuters.

By Wayne Cole

SYDNEY, April 30 (Reuters) - The Australian dollar was heading for its best monthly performance in four years on Thursday as investors wagered the worst of the coronavirus lockdowns might be over, cementing a remarkable recovery from the dark days of March.

The Aussie was enjoying the view at $0.6540 AUD=D3 having climbed 6.5% so far in April, the largest gain since March 2016. It was also 10 cents higher than the 17-year trough of $0.5510 touched in mid-March when markets were in a pandemic panic.

Its recovery was broad based, with gains of 5.8% AUDJPY=R on the yen, 6.3% on sterling AUDGBP=R and a stellar 8.1% AUDEUR=R on the euro - the largest such rise since 1993.

"Our strategy team remains tactically long AUD/JPY and short GBP/AUD," said Nomura economist Andrew Ticehurst. "Broader risk sentiment remains the largest driver of AUD's fortunes."

Australia's exposure to commodities and China make it a barometer of global growth and a favourite way for investors to hedge or wager on changing trends.

The same forces work on the New Zealand dollar, though to a lesser extent, and it was heading for gains of 2.7% in April. It was last at $0.6126 NZD=D3 and a long way from the low of $0.5469 hit in mid-March.

The kiwi has been hindered in part by suggestions from the Reserve Bank of New Zealand (RBNZ) that it could take interest rates into negative territory should the economic impact from the lockdown linger too long.

The Reserve Bank of Australia (RBA) has so far ruled out negative rates though it has been content to see overnight interbank rates steadily decline to around 0.13%, well under the official 0.25% cash rate.

It has also been buying enough government debt to anchor three-year bond yields around 0.27% AU3YT=RR , and pledged to keep them there until inflation and employment targets are once more in sight.

Nomura's Ticehurst suspected that could take several years, given inflation looked set to dive into deflation this quarter and stay negative until early 2021.

"In a COVID-19 world, we expect to see sharply higher unemployment and underemployment, price discounting and falling wages," he warned. "As a result, we have decided to lower our inflation forecasts materially."

"For rates, a low inflation outlook certainly supports our positive view on the belly of the curve; we remain long 5-yr bonds and look to add on any dips."

Yields on five-year paper AU5YT=RR have been trading around 0.44%, having started the year up at 0.99%. (Editing by Kim Coghill)