SYDNEY: The New Zealand dollar failed to get a lift on Wednesday after the country’s central bank hiked rates as expected and mostly stuck by its hawkish outlook, while the Australian dollar remained at the mercy of global recession fears.
With the policy move well priced in, the kiwi was left struggling at $0.6115 and just a whisker from a two-year low of $0.6098. Support lies at $0.6000 and $0.5920.
The Aussie was trying to steady at $0.6761, having touched a fresh two-year trough of $0.6711 overnight.
Australia, NZ dollars shrouded by global gloom, hit two-year lows
It has support around $0.6680, but risks a decline toward $0.6460.
The Reserve Bank of New Zealand (RBNZ) raised its cash rate by 50 basis points to 2.5% and signalled it would continue to tighten “at pace” to restrain inflation.
Its policy-setting committee was “broadly comfortable” with the aggressive policy path projected back in May which saw rates nearing 3.5% by the end of this year and peaking around 4% in mid-2023.
Yet the RBNZ did note that near-term upside risks to inflation were balanced by emerging medium-term downside risks to economic activity.
“The committee acknowledged that clouds are appearing on the horizon,” said Marcel Thieliant, a senior economist at Capital Economics.
“Our view remains that the ongoing housing downturn will weigh heavily on residential investment and constrain household spending, ultimately forcing the bank to stop hiking once the policy rate reaches 3.5% by year-end.”
The market reacted by nudging two-year swap rates down 5 basis points to 3.845%.
The Reserve Bank of Australia (RBA) is also expected to lift rates by another 50 basis points to 1.85% in August, though markets have recently scaled back the peak for rates.
Futures imply 3% by the end of the year, compared to 3.75% a month ago, while the top is seen around 3.5% rather than 4%-plus.
The Aussie has been undermined by concerns about coronavirus lockdowns in China that have added to downward pressure on commodity prices, with iron ore, copper and oil all falling.
“Our next target level is at $0.6670 and for us to start thinking about buying into this weakness, we would need to see signs China relaxing its zero-COVID policy and/or the US Fed pausing its aggressive tightening policy,” said Sean Callow, a senior FX strategist at Westpac.
“Neither of those look likely at the moment.”
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