Aussie to Lose Yield Advantage With Kiwi as U.S. Recovers

The Australian and New Zealand dollars are poised to reverse this year’s advance as a recovery in the U.S. reduces the South Pacific nations’ interest-rate advantage.

The Aussie and kiwi, two of the three best-performing major currencies versus the U.S. dollar this year and over the past month, have formed what are known as bearish double-top patterns that may signal declines are due. A key momentum indicator shows New Zealand’s currency has exhausted its climb, with its Australian counterpart close to following suit.

The Antipodean currencies already started retracing gains before a U.S. Labor Department report tomorrow that economists say will show employers added the most jobs to payrolls in four months. That comes after Citigroup Inc.’s Economic Surprise index for the country rose from a 19-month low in March, with reports showing fewer Americans sought jobless benefits and a rebound in manufacturing. The gains have boosted confidence the Federal Reserve will next year lift its key rate from a record.

“We’re close on both Aussie and kiwi to suggesting tops may be forming,” Tim Riddell, the Singapore-based head of Asian research at Australia & New Zealand Banking Group Ltd., said in a phone interview yesterday. “Given we’ve got key U.S. data this week with the nonfarm payrolls, the scenario is ripe for a bounce back in the economic surprise index, and that should impact positively on the U.S. dollar.”

Best Performer

New Zealand’s currency has posted the biggest gain among its 16 most-traded peers tracked by Bloomberg this year, climbing 3.9 percent versus the greenback as the nation became the first developed economy to raise interest rates this year. The kiwi climbed to a 2 1/2-year high of 87.02 U.S. cents on April 1, before falling back to 85.36 at 12:18 p.m. in New York.

The Aussie was the best performer in the past month and has gained 3.4 percent this year. It traded at 92.17 U.S. cents today, after touching a four-month high of 93.04 on April 1 amid signs policy makers are proving successful in efforts to rebalance the economy away from mining. That has led the central bank to signal it won’t enact further interest-rate cuts.

An indicator of a currency’s underlying trend, known as the moving average convergence-divergence measure, shows the New Zealand dollar’s rally is overdone. The so-called MACD line for the kiwi versus the U.S. dollar fell below the indicator’s signal line in a bearish signal. The Aussie is heading for a similar bearish crossover, data compiled by Bloomberg show.

Recommended Levels

ANZ recommends selling the Australian dollar with a target of 90 U.S. cents, while the New Zealand dollar may weaken to about 83.77 U.S. cents, a level that’s the 50 percent retracement of its advance from a Feb. 4 low to the high reached on April 1, Riddell said.

A technical indicator known as daily slow stochastics, which is used to predict a security’s moves based on its proximity to highs or lows, implies an end to the kiwi and Aussie’s gains. The measure slid into overbought territory at 78 for the kiwi versus the greenback on March 31, and 89 for the Aussie on March 27. The Antipodean currencies also breached the upper line of their Bollinger bands with their U.S. peer at least twice last week, data compiled by Bloomberg show.

The U.S. dollar may be supported as the Fed continues to trim monthly bond purchases, and after Chair Janet Yellen said last month the nation’s zero to 0.25 percent interest rate could rise in “around six months” after the central bank stops buying debt. The greenback has been held back after bad weather at the end of last year and the start of 2014 weighed on a recovery of the world’s largest economy.

Greenback ‘Failure’

“The U.S. dollar has really had a bit of a failure to launch,” Emma Lawson, a Sydney-based senior currency strategist at National Australia Bank Ltd, said yesterday. “You need to see a consistency in the data post the weather effect and that will help the market believe that the U.S. economy is on track and the dollar can benefit from that.”

Citigroup’s Economic Surprise Index for the U.S., which shows whether data beat or fell short of economists’ forecasts, fell to minus 35.8 on March 17, the lowest since August 2012. Data that day showed industrial production grew at three times the forecast pace in February, while the Institute for Supply Management’s index on April 1 showed that an expansion in manufacturing accelerated last month.

The smallest number of Americans since September applied for unemployment insurance in the week ended March 22, according to a revised report today. Labor Department data tomorrow will show employers added 200,000 positions last month, the biggest increase since November, according to the median estimate in a Bloomberg News poll.

‘Buying Dip’

The Australian dollar could fall to 90 U.S. cents, and New Zealand’s currency may drop as low as 84.53 U.S. cents, according to Chris Weston, the chief market strategist at IG Ltd. in Melbourne. Following that retracement, he expects the currencies to resume their advance.

“Given what we’re seeing from trending, buying the dip is clearly the strategy that needs to be employed,” he said by phone yesterday. “If we get a really good nonfarm payrolls this Friday, that could be the start of something more significant for the dollar, but you’ve got to be selective in which currency you want to be long the dollar against.”

New Zealand’s central bank Governor Graeme Wheeler lifted the nation’s key rate by a quarter-point to 2.75 percent March 13, while Australia’s borrowing benchmark has been held at a record-low 2.5 percent since August.

Yield Advantage

Speculation that the U.S. will lift borrowing costs as the economy recovers has reduced the yield advantage of their benchmark government securities. The extra yield Australia’s 10-year note offers over the equivalent U.S. Treasury narrowed to 1.41 percentage points, from last year’s high of 1.71, while the spread on New Zealand’s bond declined to 1.86 percentage points, from as much as 2.22, data compiled by Bloomberg show.

The Aussie may drop toward 91.30 U.S. cents and the kiwi may weaken to 84.50 over the next few weeks as the currencies have already priced in much of the good economic news, NAB’s Lawson said.

Falling prices for New Zealand’s dairy exports and signs of a slowdown in China, Australia’s largest trading partner, are also threatening to end gains in the Aussie and kiwi. Retail sales expanded at the slowest pace in seven months in February, the Australian Bureau of Statistics said today in Sydney.

Pacific Investment Management Co., which runs the world’s biggest bond fund, said this week it favors positioning for declines in the Aussie as a way to hedge against a negative shock from China.

“Australia will be vulnerable to external shocks, and therefore the outlook for China will remain critical,” Adam Bowe and Robert Mead, Sydney-based money managers at Pimco, wrote in a commentary on the firm’s website. “While we still expect Chinese growth to slow gradually over the cyclical horizon, uncertainty has risen recently and risks to the outlook are tilted to the downside.”

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