Australia, NZ dollars find falling oil prices to be a two-edged sword

SYDNEY: The Australian and New Zealand dollars found some support on Wednesday as a sharp pullback in oil prices underpinned risk sentiment, though it also suggested less chance of rate increases at home.

The Aussie was flat at $0.7068, having ended little changed on Tuesday.

Immediate resistance lies at $0.7088, followed by $0.7200, with support at $0.7042 and $0.6980.

The kiwi dollar held at $0.5832, after firming 0.2% overnight.

Resistance is lined up at $0.5865 and $0.5886, while support lies at $0.5795 and $0.5770.

Markets already suspect the Reserve Bank of Australia may be done tightening after it held the key rate steady at 4.35% on Tuesday, with the probability of one more rise pared back to 50%.

A move at the next meeting in August is priced at just 25%.

While RBA Governor Michele Bullock did warn the central bank would hike again if needed to restrain inflation, many analysts now assume it would take an alarmingly high reading for second-quarter inflation to push policymakers into moving.

“Markets are intent on second guessing the end of the tightening cycle, and based on RBA commentary, the cash rate has peaked or is very close to the peak,” said Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities. He no longer expects a rise to 4.6% in August, and sees rates on hold for the rest of this year and all of 2027.

Of the four major local banks, CBA, NAB and ANZ also argue the cycle is over, while Westpac is still calling for at least one more hike.

Three-year bond yields are near their lowest since March at 4.389%, while the spread over Treasuries has shrunk to 30 basis points from more than 80 basis points a couple of months ago.

Markets still expect the Reserve Bank of New Zealand to start tightening soon given its hawkish outlook, though they now imply only two quarter-point hikes this year rather than three.

Indeed, two-year swap rates have fallen a steep 14 basis points so far this week to a three-month low of 3.26%.

Ten-year yields were trading in line with Treasuries, having offered a premium above 40 basis points back in April.

Data due on Thursday is expected to show economic growth rebounded to a solid 0.8% in the first quarter, but that was before the war-driven surge in oil prices slugged consumer spending and business sentiment.