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Bonds News

Australian dollar set for seventh weekly gain as US$ sags

SYDNEY, Aug 7 (Reuters) - The Australian dollar eased from 18-month highs on Friday but was poised for its seventh straight weekly gain as the U.S. dollar seemed stuck in a long-term downtrend, sending commodity prices through the roof.

The Aussie dipped back to $0.7209 after reaching a fresh top of $0.7242. That still left it 1% higher for the week, with solid support around $0.7175 and $0.7115.

The New Zealand dollar held at $0.6677, having gained 0.7% on the week so far. That was short of a recent seven-month high of $0.6716, but it has found plenty of support at $0.6660 and $0.6630.

The Aussie pullback came after the Reserve Bank of Australia (RBA) cautioned the latest coronavirus lockdown in Victoria state would hinder economic recovery, leading it to cut growth forecasts for the next 12 months or so.

The RBA now sees the economy growing only 4% by the middle of next year, down from 7% previously.

The outlook for the U.S. economy has become even more uncertain as the virus rages across the country, fuelling expectations the Federal Reserve will shift to even more aggressive policy settings in September.

That has seen the yield spread on 10-year debt widen to around a 32 basis-point premium in favour of Australian bonds . At the start of the year Aussie debt offered around 60 basis points less than U.S. bonds.

At the same time, a strong recovery in China has boosted demand for iron ore, Australia’s biggest export earner, and pushed its price above $120 a tonne for a gain of 50% on the year so far.

Trade data out Friday showed China imported a record amount of iron ore in July.

The bull run in commodities, including gold and copper, has in turn lifted the fair value of the Aussie, said CBA analyst Joseph Capurso.

“Our new $0.7700 estimate for fair value is about 7 U.S. cents higher than our previous estimate published in May,” he said.

“The current value of AUD/USD is at the lower end of the fair value range,” he added. “Our equation suggests the risk is AUD/USD lifts to the centre of its fair value range sooner.” (Editing by Subhranshu Sahu)

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