Australia, NZ dollars feel the strain before RBA meets on stimulus

SYDNEY: The Australian and New Zealand dollars were struggling to keep a rally alive on Monday, as tension mounted ahead of an Australian central bank policy meeting which could see a course change in its massive stimulus programme.

The Aussie was hanging on at $0.7515, after bouncing from a seven-month low of $0.7445 hit on Friday.

The temporary break of support around $0.7480 still left the technical background bearish and the currency needed to regain the 200-day moving average at $0.7571 to be on firmer footing.

The kiwi dollar was also looking vulnerable at $0.7020 , having dived as deep as $0.6947 on Friday. It did avoid a breach of the 2021 trough at $0.6923 but needs to get above major $0.7056 resistance for bulls to breathe easier.

Both won a reprieve on Friday when US payrolls data proved upbeat, but not so strong as to risk bringing forward the day when the Federal Reserve might start tapering its asset buying.

The Reserve Bank of Australia (RBA) is expected to tinker with its own stimulus programme at a policy meeting on Tuesday, but likely remain doggedly dovish overall given the latest spate of coronavirus lockdowns in the country.

"The COVID developments since the board last met suggest a dovish tone from this week's board meeting despite a likely shift away from extreme policy settings," said Su-Lin Ong, head of Australian fixed income strategy at RBC Capital Markets.

She, like most of the market, assume the central bank will not shift its three-year bond target to November 2024, from the current April 2024 line, but will announce another round of bond buying in some form or other.

The market is already priced for no extension in the yield curve target with the September three-year bond future trading at 99.585, compared with the June contract's close of 99.846.

Investors have also priced in a risk of a first rate hike by late 2022, while the RBA has been saying a move was unlikely before 2024. If the central bank were to drop 2024 from its statement, that would be taken as a green light for an earlier hike.

Data out on Monday showed the labour market was proving resilient in the face of the lockdowns, with job ads extending a record-breaking run in June.

"The Australian, and global, experience suggests that the lockdowns should prove a temporary hit to activity despite wreaking some havoc in the high-frequency data," Ong said.