Australia, NZ dollars underpinned by Asia growth, rate risks

SYDNEY: The Australian and New Zealand dollars were well supported on Monday, as surveys showed faster factory growth across Asia and markets wagered that interest rate cuts in Europe and Canada were coming this week.

In China, the private Caixin survey showed a pick-up in its main factory index to a two-year top of 51.7 in May, offsetting weakness in the official survey out last week.

Japan’s factory activity expanded for the first time in a year in May, while activity in South Korea grew at the fastest pace in two years.

All three countries are major buyers of Australian commodities and the Aussie edged up to $0.6657, comfortably above last week’s trough of $0.6591.

Resistance is expected to be tough around $0.6680 and $0.6714. The kiwi dollar firmed to $0.6153 and closer to a recent 10-week top of $0.6170.

The European Central Bank is considered certain to kick off its easing cycle this week, with the Bank of Canada also thought likely to cut rates.

Markets, in contrast, see almost no chance of an easing by the Reserve Bank of Australia (RBA) this year and even a small risk of another hike given stubborn domestic inflation.

Yet, rates are already high enough to squeeze domestic demand and data due Wednesday are expected to show the economy expanded by a miserly 0.2% in the March quarter, the third straight quarter of sub-par growth.

Australia, NZ dollars go flat

“The weakness on the activity side is likely to see the RBA hold off on any further increases in the cash rate, as it looks forward to the downstream impacts of slower growth and balances the risk of a faster deterioration in the labour market,” analysts at NAB said.

“That said, with a high bar for further hikes, still high inflation points to the risk of a longer period of stability in rates.”

Arguing against a tightening has been a slowdown in national wage growth to an annual 4.1%, which in turn led to a step-down in minimum pay awards.

Australia’s independent wage-setting body on Monday raised the national minimum wage by 3.75%, well under the 5.75% increase granted last year.

“From a macro perspective, the outcome supports our view that wage-sensitive services inflation should ease over the second half of the year, particularly across the hospitality sector,” said analysts at Goldman Sachs. “We continue to expect the RBA to commence a gradual easing cycle in November 2024.”