Australia, NZ dollars off lows as markets cling to peace hopes

SYDNEY: The Australian and New Zealand dollars found some footing on Friday, having been rescued from two-month lows overnight by renewed hopes for a Middle East peace deal, which also slugged oil prices and boosted bonds.

The Aussie held at $0.7045, after rallying almost 0.8% overnight from a trough of $0.6979.

The currency needs to break above $0.7080 to improve the technical background, which remains bearish.

The kiwi dollar dipped slightly to $0.5824, having bounced 0.7% overnight from a low of $0.5770. Resistance is now layered at $0.5846 and $0.5886.

An actual re-opening of the Strait of Hormuz would likely see oil prices retreat sharply, lessening the inflationary pulse from energy, and easing pressure on central banks for rate hikes.

Investors had already priced out almost any chance of the Reserve Bank of Australia raising rates at its meeting next week, having already hiked three times this year.

Markets now imply just a 26% probability of a rise in August, down from 80% a month ago, and just 16 basis points of further tightening this year.

“The economy has already slowed and there are strong indications in a range of timely measures that growth is set to weaken further yet,” said Paul Bloxham, head of Australian economics at HSBC.

HSBC now forecasts rate cuts beginning from the third quarter of 2027, with inflation set to cool through the end of this year and into next, he said.

Just the chance of a peace deal saw 10-year bond yields drop 8 basis points to a three-month low at 4.810%, while New Zealand’s two-year swap rate touched a seven-week trough at 3.401%.

Markets still imply an 80% chance the Reserve Bank of New Zealand will hike its 2.25% cash rate at the next meeting on July 8, given it has already signalled tightening is needed to anchor inflationary expectations.

Yet swaps have scaled back the pace of tightening to favour two hikes this year instead of three.

Data out next week is expected to show the domestic economy started the year well enough with growth around 0.8% in the first quarter, but the global spike in energy costs has since slammed the brakes on.

A survey of manufacturing out on Friday showed activity contracted in May to end seven months of expansion, while consumer sentiment remains bleak.