Australia, NZ dollars gain as Iran deal done, bonds rally as inflation fears ebb
- The Reserve Bank of Australia is widely expected to hold interest rates steady at 4.35% on Tuesday, having hiked three times this year
SYDNEY: The Australian and New Zealand dollars jumped on Monday as a Gulf peace deal led to oil prices slipping and stocks soaring, while domestic bonds rallied as inflation fears ebbed, easing pressure on global central banks.
The Reserve Bank of Australia is widely expected to hold interest rates steady at 4.35% on Tuesday, having hiked three times this year.
Much focus will be on whether the reopening of the Strait of Hormuz is enough to calm the board’s inflation concerns and to signal a pause in the current tightening cycle.
“It’ll be about the little clues as to whether the cycle is over or it’s still alive - that’s going to be really important for both the Aussie and the kiwi markets,” said Imre Speizer, a strategist at Westpac.
The Aussie - often traded as a proxy for global risk - jumped 0.6% on Monday to $0.7081, after finishing last week largely unchanged.
The break above $0.7080 has improved the technical background, but it remained well off its four-year peak of $0.7277 hit in early May.
The kiwi dollar rose 0.4% to $0.5855, having ended last week 0.6% higher to bounce away from a two-month low of $0.5770.
Resistance is now around $0.5886. US and Iranian officials said on Sunday they have agreed on a peace framework for a deal to end their war, halt the US blockade of Iran and reopen the Strait of Hormuz.
The pact will be officially signed on Friday in Switzerland.
Local bonds rallied as investors priced out the chance of imminent rate hikes Down Under.
Three-year Australian government bond yields fell 5 basis points to 4.378%, the lowest since early March and down for a seventh straight session.
Markets now imply just a 22% probability of a rise in August from the RBA, down from 80% a month ago, and just 11 basis points of tightening this year as higher interest rates have started to slow economic activity.
New Zealand’s two-year swap rate slumped 11 basis points to 3.2850%, the lowest since late March.
Markets imply a 70% chance the Reserve Bank of New Zealand will hike its 2.25% cash rate at the next meeting on July 8, given it has already signalled tightening is needed to anchor inflationary expectations.
Yet swaps have scaled back the pace of tightening to favour two hikes this year instead of three.
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