SYDNEY: The Australian and New Zealand dollars were flat on Tuesday as concerns about U.S. tariffs and central bank independence hamstrung the greenback, offsetting a dovish outlook for interest rates at home.
Minutes of the Reserve Bank of Australia July board meeting confirmed further cuts lay ahead and a decision to pause at 3.85% was largely because the majority did not want to be seen as easing too quickly.
One of the arguments against an immediate cut was that the labour market had not loosened as forecast, but data since then has shown unemployment unexpectedly spiked to a 3-1/2 year high in June.
As a result, markets imply almost a 100% chance the RBA will ease to 3.60% at its next meeting on August 12, and take rates to 3.10% by the end of the year.
“We expect another three 25 bps rate cuts this cycle – in August, November and February - down to a 3.1% terminal rate,” said Andrew Boak, an economist at Goldman Sachs.
“We view the risks as skewed to a faster and deeper easing cycle, and particularly if June’s gap higher in the unemployment rate is sustained.”
A speech by RBA Governor Michele Bullock due on Thursday should help refine the outlook and she is likely to draw questions on whether the central bank is being too slow to ease given the disappointing labour data.
Three-year bond futures were supported near a two-week high of 96.635, while 10-year yields dipped 2 basis points to 4.308%.
The Aussie held steady at $0.6520, some way above last week’s low of $0.6455. Resistance lies around $0.6540 and $0.6595.
The kiwi dollar eased a fraction to $0.5960, still weighed by a downside surprise on quarterly inflation. Major support lies at $0.5907 with resistance at $0.5990.
Markets now imply around an 80% probability the Reserve Bank of New Zealand will cut the 3.25% cash rate a quarter point at its meeting on August 20.
Investors suspect this will be close to the end of the easing cycle, with some chance of a move to 2.75% next year.
The RBNZ’s chief economist is due to give a speech on the economic impact of tariffs on Thursday and might help refine the prospects of an August easing.
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