SYDNEY: The Australian and New Zealand dollars swung higher on Monday as global stock markets started the week in a steadier mood amid hopes recent rate cuts in China will stem an economic slowdown in the giant commodity importer.
There was also some relief an Australian Federal election had resulted in a clear winner, with the centre-left Labor Party close to winning a majority in parliament. The Aussie rallied 0.8% to $0.7090, taking it further away from its recent two-year trough at $0.6829.
Resistance lies around $0.7142, with support at $0.7005.
The kiwi dollar bounced 0.9% to a two-week top at $0.6450 , putting some distance between its recent low of $0.6219. The next major resistance level is up at $0.6525. Australian shares firmed and bonds held steady as markets generally expect the new government will be fiscally responsible.
Ratings agency S&P Global said the country’s fundamentals remained sound and it expected the budget deficit to shrink faster than projected, thanks to high prices for Australia’s resource exports.
“We expect Australia’s economic recovery and commodity prices to improve fiscal outcomes faster than the March 2022 budget anticipated,” the agency said. “Further, inflationary pressures will drive nominal GDP and taxes higher.”
“Rising debt levels do not currently present a risk to our AAA rating on Australia.” Markets continue to wager the Reserve Bank of Australia (RBA) will lift rates by a quarter point to 0.6% in June. Rates are now seen around 2.5% by the end of the year, compared to 3.0% a couple of weeks ago.
The Reserve Bank of New Zealand (RBNZ) is already well ahead in its tightening cycle and widely expected to raise rates by another half point to 2.0% this Wednesday. Jarrod Kerr, chief economist at Kiwibank, assumes the RBNZ will also pull forward its projected course for rates to take account of the half-point hikes, and to lift the terminal rate to around 3.5%, from 3.35%.
“After Wednesday, we expect to see the RBNZ slow down a little and revert to 25bp hikes into tighter territory,” he added “We expect to see the cash rate rise to 3% by November and pause there.”
He argues 3% could be the peak for the cycle given the housing market is cooling rapidly and the risk of recession is looming, while investors are still wagering on something as high as 4.0%.