Key Takeaways
- Australian dollar gains for the third week, supported by reduced US rate hike chances.
- New Zealand dollar also rises on hawkish outlook from Reserve Bank of New Zealand.
- Oil prices and Gulf hostilities remain key factors influencing currency movements.
The Australian and New Zealand dollars are set to extend their gains into a third consecutive week, buoyed by reduced expectations for near-term US interest rate hikes. This trend has been driven by softer-than-expected readings on US consumer and producer prices, which have seen markets price out a July hike from the Federal Reserve and increase the odds of a September rise.
Neil Shearing, group chief economist at Capital Economics, highlighted that a sharp drawdown in oil inventories has left stocks close to critically low levels. He noted that an extended closure of the Strait of Hormuz would significantly complicate policy for central banks in Australia and New Zealand. '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,' Shearing stated.
The Australian dollar has steadied 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 New Zealand dollar held steady 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 Reserve Bank of New Zealand (RBNZ) has signalled more hikes ahead given the risks around inflation, supported by figures on consumer prices due next week. Forecasts range from 3.9% to 4.2%, up from 3.1% in the previous quarter, largely due to fuel costs. Alexandra Turcu, an economist at Kiwibank, noted that 'the real cost of the oil crisis on inflation will come out in the third and fourth quarter data.'
Turcu further explained, '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.'
Neil Shearing added, '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. 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.'
While the gains are significant, both currencies remain vulnerable to geopolitical tensions and fluctuations in global oil prices. The Australian dollar’s resistance levels of $0.7021 and $0.7088 will be key areas for traders to watch, while the New Zealand dollar could face challenges if consumer price figures exceed expectations.
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.
Neil Shearing, Group chief economist at Capital Economics
The real cost of the oil crisis on inflation will come out in the third and fourth quarter data.
Alexandra Turcu, Economist at Kiwibank
