Australia, NZ dollars hold to well-worn range amid rate doubts

SYDNEY: The Australian and New Zealand dollars held to well-worn ranges on Tuesday as a dearth of data left investors uncertain about how far local interest rates might rise next week.

The Aussie was holding at $0.6928, having spent the last few sessions boxed in by resistance at $0.6956 and $0.6996, and support around $0.6870.

The kiwi dollar stood at $0.6305, having also spent a few days idling aimlessly between $0.6244 and $0.6326.

A bounce in iron ore prices provided some support for the Aussie, though the LMEX index is still down almost 13% this quarter as markets fret over the risk of global recession.

There are also hints of a slowing in the Australian economy with house prices slipping and consumer sentiment in a deep hole.

Retail sales data due on Wednesday are forecast to show only a small gain of 0.4% after a run of very strong outcomes, which has seen the market pare back expectations for rate rises.

Futures are now not entirely convinced the Reserve Bank of Australia (RBA) will lift the 0.85% cash rate by 50 basis points at its policy meeting next week, implying a rate of 1.20%.

Rates are seen at 3.25% by the end of the year, compared with almost 4.0% a couple of weeks ago.

Australia, NZ dollars in the doldrums as commodities slide

Three-year bond yields have eased to 3.39%, from a top of 3.767% in mid-June. On the other hand, inflationary pressures show no sign of subsiding with food and energy costs spiking.

Analysts at Goldman Sachs warn consumer price inflation could jump to a peak of 8.1% in the third quarter, even higher than the RBA’s recently upwardly revised forecast of 7%.

“From a policy perspective, we continue to expect the RBA to hike to a terminal rate of 3.1% by end 2022 – around 50bp above our estimate of ‘neutral’ – to prevent an overshoot of inflation beyond 2024,” said GS economist Andrew Boak.

“On balance, we view the risks to our rates forecast as skewed to the upside over the next 12 months or so, including a 35% chance that the RBA accelerates the monthly pace of tightening to +75bp over the coming quarter.”