Australia, NZ dollar retreat amid doubts on rates, China boost

SYDNEY: The Australian dollar swerved lower on Tuesday as markets lengthened the odds on an increase in interest rates for July, while a lack of news on Chinese stimulus chilled risk sentiment.

The Aussie retreated 0.9% to $0.6790, giving up a chunk of last week’s hefty gains and breaking chart support around $0.6795.

The New Zealand dollar followed with a loss of 0.6% to $0.6160, taking it away from a recent three-week top of $0.6247.

Both were dragged down by a drop in the Chinese yuan as markets grew frustrated by a lack of new policy steps from Beijing.

The Aussie is often used as a liquid proxy for the yuan given China is the single biggest importer of Australian commodities.

At home, minutes of the Reserve Bank of Australia’s (RBA) June policy meeting showed a decision to raise interest rates by a quarter point to 4.1% was “finely balanced”.

Australian dollar struggles as market reverses course on rates

Guidance on yet further increases was also absent, even though it was included in the post-meeting statement. Markets took that as slightly dovish and trimmed the probability of a hike in July to 44%, from 58% before the minutes were released.

Analysts, however, noted that the RBA board still felt risks to inflation had shifted to the upside and jobs data released since the meeting had been much stronger than expected.

“As such we wouldn’t read too much into these comments and we still expect the RBA to raise rates two more times to 4.6%, having pencilled in increases in July and August,” said Tapas Strickland, head of market economics at NAB. Futures and swaps seem to agree with about 44 basis points of further tightening priced in.

Much will depend on the outcome of the monthly consumer price index for May due next week.

The April report disappointed by showing annual inflation climbing back up to 6.8%, and another upside surprise, particularly on service costs, would greatly narrow the odds on an increase in July.

For the kiwi, the Reserve Bank of New Zealand (RBNZ) has already signalled that it is done tightening with rates at 5.5%, leaving the currency vulnerable as other central banks keep hiking.

“Interest rates have peaked in New Zealand, as they are still rising offshore,” said analysts at Kiwibank in a note.

“Narrowing interest rate differentials, falling commodity prices and weakening risk appetite should see the kiwi reach $0.5500 by year end.”