Australian dollar slips to three-month low, RBA no help

SYDNEY: The Australian dollar hit a fresh three-month low on Tuesday as the greenback extended its recent climb, while mixed messaging on the outlook for rates from the country’s central bank kept yield spreads compressed.

The Aussie slipped 0.3% to $0.6867, and was getting dangerously close to its March trough of $0.6834.

A break would take it to levels not seen since January and risk a retreat to $0.6660 or lower.

The kiwi dollar eased to $0.5643, having already reached lows for the year so far at $0.5627.

The currency has now fallen for nine of the last 10 sessions and the bear trend threatens major support at $0.5581.

Minutes of the Reserve Bank of Australia’s June policy meeting showed the board still saw upside risks for inflation and stood ready to raise rates again if needed, having already hiked three times this year.

A major concern had been inflationary pressure from oil prices, yet Brent has fallen 13% since then to be back where it was before the US and Israel attacked Iran.

Board members also sounded increasingly concerned about the risk of a sharp downturn in the housing market as demand faltered in the face of higher borrowing costs and proposed tax changes on investment properties.

“The Minutes are consistent with the view the balance of risks had been shifting a bit, away from upside risk to inflation, and towards downside risk to growth,” said Taylor Nugent, a senior economist at NAB.

“It remains too early for the RBA to be completely comfortable, but we expect the Board will remain on hold, needing a more emphatic case in the data to deliver some further insurance tightening.”

Markets imply just a 15% chance of a rise in the 4.35% cash rate at the next RBA meeting in August, and a 60% probability it is done hiking for this cycle.

Instead, a first cut is being priced in for late 2027.

Australian three-year bonds now pay only 27 basis points more than Treasuries, compared to around 85 basis points in April.

The Reserve Bank of New Zealand meets next week and markets imply around a 70% chance of a quarter-point rise in the 2.25% cash rate, though analysts are more divided on the need for a move given the recent slide in oil prices.