FX.co ★ Metals market and rising inflationary expectations are pulling up commodity currencies. Overview of USD, AUD, NZD

This week's main trend is a sharp growth in commodity prices. Iron ore led the gains, surging nearly 10% at the opening on Monday, while metals and energy were up by 1-2%. As the markets become more confident that the Fed, together with other central banks, does not intend to begin cutting stimulus just yet, commodity prices are rising on the belief that the global economic recovery will not be hindered.

It is true that there is a claim that the rise in commodity prices is due not so much to the recovery as to veiled hyperinflation, but their skeptical comments are ignored. In any case, inflation expectations are rising and the yield on the 5-year inflation-protected TIPS bond reached 2.71%, which is the highest since March 2006. The discount rate in those distant years, with such a level of inflation expectations, ranged from 3.5% to 4.5%, that is, the Fed's position is currently not quite justified.

The US dollar remains under pressure, while commodity currencies are in favor.

NZD/USD

The previous week provided an opportunity to assess the prospects for economic recovery in New Zealand, and most of the indicators in favor of further strengthening the NZD.

At the same time, the preliminary data from the ANZ Business Outlook for May showed that business confidence rose by 9 points to +7%, while the forecast for business activity rose 10 points to +32.3%. Export, investment and employment plans, capacity utilization and profit expectations increased by 4-10 points. A number of indicators sharply surpassed the dock level.

Inflation expectations rose from 2.0% to 2.2%, which is already higher than the RBNZ target, and the relative share of companies that intend to raise selling prices exceeded the maximum since 1992. Thus, profit expectations at their highest since October 2017.

The Reserve Bank is also adjusting its forecasts in the current environment. RBNZ's quarterly survey shows that already half of the respondents expect a rate increase in the next two years, as inflation expectations are rapidly growing. They were at the level of 0.74% in June 2020, 1.73% in December, and rose to 2.05% in the first quarter of 2021, exceeding the target level of the RBNZ.

It is not surprising that players expect the transition to the aggressive monetary policy of the RBNZ earlier. These expectations lead to an increase in price pressure, which increases the probability of overheating to which the RBNZ will have to respond by raising rates.

During the reporting week, the net long position in the New Zealand dollar rose by 11 million and reached 614 million. The advantage is not very strong, but in addition to futures, the yield spread on 10-year bonds began to reverse in favor of the NZD. As a result, the target price has moved above the long-term average and is heading upwards.

Based on the current situation, it can be concluded that the NZD has an advantage over the USD in the short term and so, the chances of updating the high of 0.7463 have increased. The nearest target is set at 0.7330/60, where the border of the upward channel is located.

AUD/USD

NAB's survey of business activity for April revealed strong growth in both key indicators. The business conditions index rose to 32p, while business confidence to 26p. Both indicators exceed the historical maximum since the beginning of observations in 1997. In this case, the bank comments, "The results of the April survey are simply stunning. We have passed the recovery phase and are now seeing healthy growth in most of the economy."

On the futures market, the weekly change of 223 million is in favor of the Australian dollar, but it is too early to talk about the steady formation of a long position. The dynamics of bond yields are also quite neutral, so a small preponderance of bulls on the spot looks strong, pushing the AUD rate up. However, the confirmations are still unstable from the viewpoint of fundamental nature.

The AUD/USD pair broke through the resistance zone of 0.7840/50 and from a technical point of view, the chart became much more bullish. The nearest target level is 0.7900, followed by 0.8000.