Australia, NZ dollars regain some footing amid Middle East shocks

SYDNEY: The Australian and New Zealand dollars fought to regain ground on Thursday as an expanding Middle East conflict lifted oil prices and buffeted asset markets, overshadowing a mixed bag of domestic economic data.

The Aussie had edged up 0.4% to $0.7054, after retreating 1.1% overnight from a top of $0.7173 as risk sentiment globally took a beating.

More chart support is down at $0.6980 and $0.6945.

The kiwi dollar also added 0.4% to $0.5823, having fallen 1.0% overnight and away from a top of $0.5872.

It has major support at $0.5775.

Bond markets were hard hit as the ongoing spike in oil threatened to stoke inflation globally and turn central banks more hawkish.

Notably, futures drastically scaled back the chance of easing from the Federal Reserve. Yields on Australian three-year notes shot up 11 basis points to their highest since mid-2011 at 4.629%, while 10-year yields jumped 8 basis points to 4.98%.

On the face of it, data showing Australian employment jumped a strong 48,900 in February should support the Aussie.

Yet all the gains were in part-time jobs and the unemployment rate rose two ticks to 4.3% as more people went looking for work.

Markets imply a 55% chance the Reserve Bank of Australia will raise rates by 25 basis points to 4.35% in May, which would be the third straight hike.

“We still believe the labour market is tight and unlikely to prevent the RBA from hiking rates further,” said Josh Williamson, head of Australian economics at Citi. “Inflation pressures will likely remain at the forefront of RBA’s concerns, which the oil shock threatens to compound,” he added.

“The longer the conflict continues for, the higher the risk of further RBA remedial action.”

The financial stability department of the RBA on Thursday was busy highlighting material risks to the domestic economy from events in the Middle East, including a possible recession.

Over in New Zealand, data showed the economy grew a disappointing 0.2% in the fourth quarter as household spending went backwards and construction hit a hole.

“And that’s before the sharp deterioration in the outlook over the past three weeks,” said Jarrod Kerr, chief economist at Kiwibank. “This is not an economy demanding rate hikes to fight off a supply-side shock to oil,” he argued.

“The potential damage to demand outweighs the lift in inflation.”