AUD & NZD G10 underperformers in April & MayChina ‘lockdown’, economy risks both key driversA further 5 cents of losses possible for AUD, NZDIf containment measures remain through October

Pine timber being exported from Wellington, New Zealand. Photo by James Anderson, World Resources Institute.

The Australian and New Zealand Dollars led a major currency rebound early in the midweek session but remained underperformers for the month to early May and Commonwealth Bank of Australia has warned that recent losses could yet extend further and by up to five cents in both cases.

Australia and New Zealand’s Dollars rallied from near the bottom of the major currency board for the week on Wednesday following reports of a decline in the number of new coronavirus infections detected in China’s largest city Shanghai.

But both remained close to the bottom of the major currency league table for the week and month to May 11, while Commonwealth Bank of Australia research suggests this underperformance could continue if China persists with its effort to eradicate the coronavirus over the coming months.

“We consider China’s unexpected and strict lockdowns are the main reason for the slump in AUD and NZD. Both Australia and New Zealand commodity exports have material exposure to Chinese domestic demand,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

“The lockdowns have contributed to a decrease in commodity prices important to Australia and New Zealand. Our New Zealand commodity price index has decreased by 6% since early April. We estimate Australia’s commodity price index has decreased by 10% since early April,” Capurso and colleagues said in a Wednesday research briefing.

Above: AUD/USD shown at daily intervals alongside NZD/USD. Click image for closer inspection.

Recent losses mark a reversal of fortune for two currencies that were previously the top performers for the month between late February and March incorporating Russia’s initial invasion of Ukraine and the first weeks of the ongoing war, which lifted commodity prices and currencies substantially.

Deep as they are already, the losses seen through April and the early weeks of May could double through the remainder of the year if the coronavirus continues to spread in China and authorities persist with their attempts to eradicate it.

“The largest uncertainty for the near term outlook for AUD and NZD is how long China’s ‘dynamic clearing zero policy’ will last. So far, no official roadmap out of the current covid policy has been released by state media. Therefore, an exit from the covid policy is not imminent,” Capurso says.

“The lack of a roadmap suggests concerns about China’s economic outlook will remain a weight on AUD and NZD in the near term. If we are wrong that lockdowns will end well before October, AUD and NZD could fall by another 5 US cents in coming months, putting at risk our existing forecasts for end June and end September,” Capurso and colleagues also said on Wednesday.

Above: Commonwealth Bank of Australia model estimates of fair value. Click for closer inspection.

The Australian Dollar had already fallen by 3.5% against the U.S. Dollar for 2022 on Wednesday after the AUD/USD pair declined from 0.7250 on January 01 to almost 0.70 at the mid-week milestone.

Meanwhile, the New Zealand Dollar was down by a larger 7% after NZD/USD fell from 0.68 to around 0.6350 between new year and Wednesday, although both sets of performance figures disguise even larger gains and losses during the intervening period.

These losses have, however, deepened what was already a steep undervaluation of both currencies when measured by Commonwealth Bank of Australia estimates of their appropriate or fair value.

“We conclude the recent slump in AUD and NZD is modestly out of proportion with the change in their fundamental drivers, especially given the starting point for valuation. We estimate both AUD and NZD are now considerably undervalued,” Capurso said on Wednesday.

“We are confident AUD and NZD can recover strongly before year end once there are signs the lockdowns will end,” he added.

Above: AUD/USD shown at weekly intervals alongside NZD/USD. Click image for closer inspection.