Australia, NZ dollars set to extend gains to third week

SYDNEY: The Australian and New Zealand dollars were aiming for a third straight week of gains on Friday as markets scaled back the chance of near-term US rate hikes, though hostilities in the Gulf remained a threat to risk sentiment.

With Brent prices up 17% in just two weeks, an extended throttling of the Strait of Hormuz would greatly complicate policy for the Antipodean central banks.

“A sharp drawdown in oil inventories has left stocks close to critically low levels, so the oil market has much less capacity to absorb another supply shock,” said Neil Shearing, group chief economist at Capital Economics.

“A prolonged closure would probably push inflation in most developed nations to at least 5% y/y, prompting major central banks to raise interest rates.”

For now, surprisingly soft readings on US consumer and producer prices have seen markets price out a July hike from the Federal Reserve and lengthen the odds on September.

That has helped the Aussie steady at $0.6998, having gained 0.7% for the week so far.

Resistance lies at $0.7021 and $0.7088, with support around $0.6913.

The kiwi dollar held at $0.5845, putting it 1.4% higher for the week.

A break of $0.5865 would open the way for a re-test of the May top at $0.59935.

The currency has been supported by a hawkish outlook for domestic rates after the Reserve Bank of New Zealand signalled more hikes ahead given the risks around inflation.

Figures on consumer prices for the second quarter are due next week and forecasts range from 3.9% to 4.2%, up from 3.1% the previous quarter, largely due to fuel costs.

The RBNZ is tipping 3.9% as the top of the cycle, but that was before the latest spike in oil.

“The real cost of the oil crisis on inflation will come out in the third and fourth quarter data,” said Alexandra Turcu, an economist at Kiwibank.

“With the way the war in the Middle East is re-escalating at the moment, we can’t be confident that the supply shock will pass any time soon.”

“Prices will go up, and the Bank’s concern is that they won’t come back down after the shock is over,” she said.