Australia, NZ dollars recoil as market mood darkens

SYDNEY: The Australian and New Zealand dollars lost further ground on Friday and are nursing sizable weekly losses as a retreat in AI trades and deadlock in the Gulf conflict combine to undermine the risk-sensitive currencies.

The Aussie edged down 0.3% to $0.7110, bringing its losses for the week so far to 1.0%. Major support lies at $0.7080, with resistance at $0.7200 and $0.7277.

The kiwi dollar slipped 0.2% to hover at $0.5852, faring even worse for the week with a loss of 2.3%.

A recent top of $0.5993 has become a daunting chart barrier, while support lies at $0.5816 and $0.5681.

The pullback in the kiwi was particularly disappointing for bulls given the Reserve Bank of New Zealand had taken a hawkish turn just a week before.

Markets now imply a 65% chance the RBNZ will lift its 2.25% cash rate by a quarter point at its next meeting on July 8 and peak around 3.50% late next year.

“Due to an unmistakable hawkish pivot we pulled forward our forecast start of the RBNZ tightening cycle to July/September, from December,” wrote analysts at Goldman Sachs in a note.

“The policy outlook is highly uncertain but we lean towards a mini pre-emptive tightening cycle,” they added, seeing rates topping out at just 2.75%.

“The main reason is that we expect inflation to undershoot RBNZ forecasts given the sheer scale of spare capacity in the NZ economy.”

The Reserve Bank of Australia has already hiked three times to 4.35% and Governor Michele Bullock seems content to watch and wait for now. Deputy Governor Andrew Hauser is speaking at a conference later on Friday and is expected to repeat that line, though his comments have sometimes moved markets in the past.

“We expect no further rate hikes by the RBA, with signs of softening activity likely to outweigh lingering inflation concerns,” said Samara Hammoud, a currency strategist at CBA.

“In contrast, we expect the US Fed to start a tightening cycle in December. As such, the narrowing of Australia-US interest rate differentials can continue to weigh on AUD/USD.”

Australian 10-year bonds currently pay around 43 basis points more than Treasuries, down from a peak above 80 basis points back in March.