How many g’days do Aussie, kiwi have left?

Bullish forces have supported parabolic gains in the Australian and New Zealand dollars vs. the U.S. dollar during March and April. A scorching rally has propelled the Australian dollar to 17-year highs and the New Zealand dollar to 25-year highs vs. the greenback (Figures 1 and 2). What’s behind the massive push to these historical levels and, more importantly, can the uptrend continue? Let’s take
a look.

The Australian and New Zealand currencies remain inextricably intertwined within the
global carry trade, in which money managers sell Japanese yen at a low rate in exchange for higher-yielding plays. With Australia and New Zealand boasting some of the highest domestic interest rates in the industrialized world at 6.25 percent and 7.75 percent, respectively, there has been hefty demand for the currencies down under in recent months.

However, the popularity of these currencies as one leg of the carry trade also leaves them vulnerable to extreme levels of volatility. Alook at daily charts reveals a swift pullback following the Feb. 27 global shift toward risk aversion. A bout of worldwide profit taking in late February tugged the Australian and New Zealand dollars to sharply lower levels within roughly a week’s time as players quickly exited their carry trade positions involving the yen.