Robin Winkler, Strategist at Deutsche Bank, suggests that their short AUD and NZD have suffered from a sharp improvement in risk appetite thanks to benign signals from the Fed and China. Key Quotes “At least until the June FOMC meeting, the Fed’s accommodation of global risks may continue to bolster carry currencies. However, lifting our year-end forecasts by 8 cents to AUD/0.68 and NZD/0.63, the cycle lows, we retain our bearish bias in the medium term. First, carry conditions are likely to deteriorate again. FOMC members have coalesced around two rate hikes this year. This outlook appears to factor in greater global risks than the market perceives at the moment and should therefore prove robust if market concerns over China were to resurface in the second half of the year. Conversely, if China were to remain stable, the Fed could quickly turn more hawkish again. For the Antipodes the risks therefore remain skewed toward short-term yield spreads against the US tightening again, even if the Reserve Banks refrain from cutting rates below 2%. Second, the commodity slump is far from over. Our commodity strategists expect iron ore prices to fall back to $40 later this year, consistent with AUD/USD around 0.70 on a simple regression. They note that the credit-driven bump in Chinese steel production in the first quarter has only delayed necessary closures among mid-tier producers, and the market still requires prices to fall to the low $40s to squeeze out excess supply. As for New Zealand’s dairy exports, futures indicate that milk powder prices may remain well below farmers’ average break-evens going into the 2016/17 season. The second-round impact on sectors that indirectly depend on dairy farming continues to pose downside risks to domestic inflation and employment. Lastly, both Antipodes have become notably overvalued again on a PPP basis, and the AUD in particular also remains very expensive on our BEER and FEER models. In the medium term, this still matters.” For more information, read our latest forex news.