Australia, NZ dollars on the ropes after rough month

SYDNEY: The Australian and New Zealand dollars seemed destined for heavy monthly losses on Tuesday with the Middle East war threatening a damaging economic mix of higher inflation, weaker demand and rising borrowing costs.

The Aussie looked punch drunk at $0.6852, after falling for eight straight sessions to hit a two-month low of $0.6834.

That left it down 3.7% for March and under major support at $0.6897. The next bear target was $0.6766.

The kiwi dollar had recoiled to $0.5715, having shed 4.6% on the month so far to touch a four-month trough at $0.5700.

The next major chart bulwark is not until $0.5581.

The bleak economic outlook was underscored by minutes of the Reserve Bank of Australia’s last board meeting, where a razor-thin 5-4 vote saw it raise rates to a 10-month high of 4.10%. The hawks argued the war-driven spike in energy costs meant an immediate hike was needed, while the other four thought the threat to economic growth warranted a delay.

“The appropriate response will depend on how they weigh competing risks,” said Taylor Nugent, a senior economist at NAB.

“Given the extent of inflation pressure from the shock in the Middle East and the domestic starting point of above-target inflation capacity constraints, we expect one additional increase to the cash rate in May to a peak of 4.35%.”

Westpac chief economist Luci Ellis caused a stir on Monday by tipping hikes in May, June and August, which would take rates to 4.85% and heights not seen since December 2008.

Investors are currently pricing a 58% chance the RBA will move in May, and imply around 60 basis points of total tightening left for 2026.

The Reserve Bank of New Zealand meets next week and is thought near-certain to hold the official cash rate at 2.25% as it assesses the damage done by spiking energy prices.

Markets are almost fully priced for a hike by July and see rates nearing 3.0% by year-end.

“The RBNZ will balance a desire to avoid a further tightening of financial conditions with the desire to not sound complacent about the medium-term inflation risks,” said Kelly Eckhold, chief NZ economist at Westpac.

“That should continue to lean against the market’s current pricing of more than three 25bp OCR hikes by the end of this year.”