Australia, NZ dollars jolted as US rate outlook shifts

SYDNEY: The Australian and New Zealand dollars were on the defensive on Thursday after a hawkish shift on the outlook for US interest rates buoyed the greenback broadly, while domestic economic news again disappointed.

The Aussie was stuck at $0.7124, having retreated 0.9% the previous session to as low as $0.7102.

Resistance lies around $0.7200 and the recent four-year top of $0.72215, while a break under $0.7100 would risk a pullback to $0.7030.

The kiwi dollar idled at $0.5830, after losing almost 1.0% on Wednesday to as low as $0.5816.

Multiple failures to clear $0.5919 resistance risk a return to $0.5790, if not $0.5681.

It took an added knock when a closely watched survey of local businesses showed confidence fell off a cliff in April as surging energy costs darkened the outlook for profits and sales.

The Aussie had already been undermined by an inflation report that was not as hot as some bulls had wagered on, triggering some paring of long positions.

Yet investors were still wagering that the Reserve Bank of Australia was more likely than not to lift interest rates for a third time when it meets on May 5.

Markets imply an 80% chance of a quarter-point rise in the 4.10% cash rate, which would take it back to its post-COVID highs. A further move to 4.60% was priced by September.

“Together with a spike in both consumer inflation expectations and business survey measures of costs and prices, the March inflation data will have the RBA’s inflation warning lights flashing bright red,” warned Luci Ellis, chief economist at Westpac.

“A May hike is locked in and we hold to our base case that there will be two further rate hikes, in June and August.”

Others are not quite as hawkish, noting the nine-member policy board split 5-4 on raising rates in March and the lack of a resolution to the Gulf conflict made for a very uncertain economic outlook.

“Another split decision is expected given the moving parts and if anything, the decision in May feels more precarious than March,” said Belinda Allen, head of Australian economics at CBA.

“Ultimately, we expect enough votes to lift the cash rate to carry on the day, just.” “After May, we expect the RBA to remain on hold given we see activity slowing under the weight of three rate hikes and higher energy prices.”