Kiwi braces for RBNZ decision, Aussie tries to steady after setback

SYDNEY: The New Zealand dollar edged higher on Monday as traders braced for a widely expected interest rate hike at home, while the Aussie was trying to recover momentum after a US dollar induced setback.

The kiwi dollar rose 0.2% to $0.5919, after slipping 0.6% on Friday to finish 1% lower last week.

It has support at the $0.5860 and $0.5821 levels and is set to end August 0.6% higher.

The Reserve Bank of New Zealand is widely expected to raise interest rates by a quarter-point to 2.75% on Wednesday, but there is much uncertainty about how high interest rates would go with its new economic forecasts.

Oil prices climbed over 2% on Monday as fresh fighting broke out between the US and Iran, fuelling inflation risks.

Investors see rates reaching 3.0% by December and 3.5% next year as the central bank shifts from outright stimulus to a more neutral policy stance.

“For FX, we see downside risks for the NZD around this meeting, given the high hurdle for the RBNZ to validate market pricing,” said Francesco Pesole, a FX strategist at ING, who is tipping two more rate hikes to 3.0%.

“A less hawkish RBNZ than markets anticipate could limit gains and keep the pair capped around 0.60.” Across the Tasman, the Aussie edged up 0.2% to $0.7170, having lost 0.5% on Friday to break an eighth-week winning streak.

It also faded from a three-month peak of $0.7208, with support now around $0.7137 and $0.7067.

For the month, it is set for a gain of 2.1%. Data on Monday showed inventories likely shaved 0.3 percentage points off Australia’s gross domestic product in the second quarter.

The economy is likely to have expanded by a modest 0.3% in the quarter, with the annual pace slowing to 1.8%, a Reuters poll showed.

Private-sector credit growth eased in July as three interest rate hikes this year worked to slow down demand.

Housing credit rose 0.5% in the month, easing from 0.6% in June, while business credit still ran at a brisk pace of 0.9%.

The risk of persistent inflation is the main reason that markets are wagering on a 56% probability that the Reserve Bank of Australia will hike interest rates for a fourth time next month.

A move by November is all but fully priced in.

“The RBA has no easy choices from here. If growth is weak and inflation is still too high, it may be able to avoid having to lift its cash rate further,” said Paul Bloxham, chief economist at HSBC.

“If growth is stronger, the RBA may have to choose to hike further to weaken growth more, risking pushing the economy into a bigger downswing or even a recession to get inflation down.”