Australia, NZ dollars left adrift as Gulf war bewilders

SYDNEY: The Australian and New Zealand dollars turned defensive again on Friday as renewed fighting in the Gulf pushed oil prices higher, though both currencies remained in sight of recent highs.

The Aussie was almost flat at $0.7207, having dipped 0.4% overnight and away from a four-year peak of $0.7277.

It was also little changed on the week so far, with support now around $0.7198 and $0.7136.

The kiwi dollar was a shade softer at $0.5932, after easing 0.3% overnight. Resistance comes in at a two-month top of $0.5991, with support around $0.5926 and $0.5858.

Rising oil prices have complicated Australia’s inflation fight, with the Reserve Bank of Australia raising cash rates to 4.35% this week, among the highest in developed economies.

This has also put pressure on the government to restrain spending in its 2026/27 budget due next week, or at least limit its budget deficit.

Analysts expect a deficit of around A$25 billion, or 0.8% of GDP, narrower from the A$37 billion forecast earlier, buoyed by strong company tax receipts and commodity prices.

“We think it could suggest a little more fiscal tightening in 2026/27,” said Andrew Ticehurst, an analyst at Nomura.

“Our expectation for some fiscal contraction plays into our view that the RBA will most likely not raise the cash rate any further this year.”

Markets remain fully priced for one more hike to 4.60%, likely in September. George Tharenou, an economist at UBS, cautioned that broader measures of spending that included State governments point to much larger deficits overall, approaching 5% of GDP.

“Our assessment is fiscal policy will remain stimulatory,” Tharenou said.

“Hence, the fiscal impulse will maintain upward pressure on demand and inflation.”

He sees core inflation ending the year up at 4.0%, above the RBA’s forecast of 3.5% and far from the central bank’s target range of 2% to 3%.

“We expect the RBA will hike again to 4.60%, likely in August, with a risk for even more and for rates to stay higher for longer - well into 2027.”