Australia, NZ dollars recover after hawkish Fed turn; kiwi aided by strong data

SYDNEY: The Australian and New Zealand dollars steadied on Thursday as the signing of the Iran deal pulled oil prices lower and helped stocks recover, cushioning some of the blow from a hawkish turn by the Federal Reserve that hammered risk assets.

The Aussie rose 0.3% to $0.7037 after slumping 0.8% overnight to as low as $0.6995. Near-term support is at $0.6980 while resistance is heavy at $0.7088, followed by $0.7200.

The kiwi dollar gained 0.5% to $0.5793, having dropped 1.1% overnight to dip as far as $0.5754, the lowest level since early April.

A strong first-quarter GDP report added to the case that the economy was recovering before the US-Israeli war on Iran kicked off.

Overnight, the Fed held interest rates steady as expected, but new economic projections showed about half of the Fed officials expect at least one rate hike this year, a sharp turnaround from March when the consensus was still for rate cuts.

New Fed Chair Kevin Warsh refrained from submitting an interest rate path projection.

Still, the unexpected hawkish turn of the board triggered a heavy selloff in stocks and bonds and boosted the US dollar. A rate hike by October is now fully priced in by the futures market.

“We no longer project easing in our forecast horizon (vs 75 bps of rate cuts in 2027), and look for the FOMC to stay on hold going forward,” analysts at TD Securities said in a note to clients.

“USD is set for a near-term rebound as rate differentials and positioning re-align in its favor, with AUD and EM carry particularly exposed.”

Local data showed the New Zealand economy grew 0.8% in the first quarter, picking up from a 0.5% gain the previous quarter.

That lifted the annual pace to 1.5%, well above analyst expectations for a 1.1% gain.

That suggested the economy had eliminated its negative output gap, said Josh Williamson, chief economist at Citi Australia and NZ, adding that a slowdown in the second quarter due to the war’s impact could be a one-off if peace in the Middle East was sustained.

“Which could convince internal MPC members who voted for a hold at the last meeting that the time is right to start normalising the OCR, particularly as the current OCR of 2.25% is so far away from the RBNZ’s estimate for neutral of 3.0% to 3.5%,” said Williamson.

Swaps imply an 80% probability that the RBNZ could start tightening in July given its hawkish outlook, even though oil prices have slumped 15% this month alone.

A total tightening of 60 basis points is priced in for the year.

In contrast, markets already suspect the Reserve Bank of Australia may be done tightening after it held its key rate steady at 4.35% on Tuesday, with the probability of one more rise pared back to 50%.

That helped Aussie government bonds outperform US Treasuries.

Three-year bond yields rose 3 basis points to 4.421%, while the spread over Treasuries has shrunk to 23 basis points from more than 90 basis points a couple of months ago.