Australia, NZ dollars dragged as recession fears dog resources

By Wayne Cole

SYDNEY, June 23 (Reuters) - The Australian and New Zealand dollars lost ground on Thursday as concerns mounted aggressive monetary tightening by global central banks would tip the world into recession, undermining commodity prices but boosting bonds.

The Aussie slipped 0.4% to $0.6897 AUD=D3 , having been as low as $0.6881 overnight. The break down out of a recent wedge formation risks a test of last week's $0.6850 trough and a retreat to the May low at $0.6829.

The kiwi dollar was struggling at $0.6260 NZD=D3 after falling as far as $0.6244 overnight. Major support lies at its recent low of $0.6197.

The mood was soured when Federal Reserve Chair Jerome Powell underlined their commitment to bringing inflation down at all costs, conceding that sticking a soft landing would be "challenging."

"The prospect of a recession in the U.S. underscores the weakening demand environment for commodities," said Vivek Dhar, a mining & energy analyst at CBA.

"Most other advanced economies are in a similar position in engineering a slowdown to combat rising inflation," he added. "Emerging and developing market economies are in an even more precarious position given their weaker economic state coming out of COVID-19."

Oil became the latest commodity to succumb to demand woes, a drag for Australian trade as it is a major exporter of energy and resources. Iron ore was already at six-month lows having lost more than 20% in recent weeks, while copper struck a 15-month trough overnight.

All of which serves as a convenient excuse to short the Aussie, though it is worth noting the currency never got much lift when commodity prices were surging to multi-month highs so the correlation is far from perfect.

The risk of recession was a relief for bonds, which have been suffering from inflation fears, sending 10-year yields AU10YT=RR back down to 3.825% and away from last week's year-year peak of 4.125%.

That narrowed the spread over Treasuries to 68 basis points from a top around 90 basis points last week.

Three-year yields AU3YT=RR also eased to 3.44%, from a recent high of 3.767%, though market continue to price in drastic rate hikes from the Reserve Bank of Australia (RBA).

Westpac chief economist Bill Evans on Thursday revised up his forecast for the current 0.85% cash rate, tipping hikes of 50 basis points in both July and August.

He now sees rates peaking at 2.6%, rather than 2.35%, though that remains far short of market pricing of 4.0%.
Editing by Sam Holmes

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