Australian and New Zealand dollars fall as inflation risks loom

Key Takeaways

Australian dollar hits eight-week low, down 1.5% last week.
Reserve Bank of Australia set to hike rates by 25 basis points on Tuesday.
New Zealand dollar also weakens, expected to see further rate hikes.

The Australian and New Zealand dollars have seen significant depreciation, with the Australian dollar hitting an eight-week low of $0.7004, down 1.5% last week. This decline has broken key support at the 200-day moving average of $0.7025, leaving it well below a four-month peak of $0.7238.

The Reserve Bank of Australia (RBA) is set to hike interest rates by 25 basis points to 4.60% on Tuesday, marking its fourth rate hike this year. Markets are currently pricing in about 40 basis points of further tightening after Tuesday’s hike.

Joseph Capurso, head of foreign exchange at the Commonwealth Bank of Australia, predicts that the Australian dollar may receive some brief support from a ‘hawkish hike’ by the RBA on Tuesday. However, he still expects the currency to fall this week, likely testing $0.6951.

The New Zealand dollar has also weakened, hitting a three-month low of $0.5650 after losing 1.1% last week. This marks the fifth straight week of declines, with support now at the July low of $0.5627.

Paul Bloxham, chief economist at HSBC, expects the Reserve Bank of New Zealand (RBNZ) to become more hawkish after two rate hikes this year. The RBNZ is expected to hike rates again in Q4, with an 80% chance of a quarter-point hike to 3.0% at its next meeting on October 28.

Bloxham notes that the economic recovery in New Zealand is gathering pace, driven by a well-below neutral cash rate starting point. This has necessitated faster rate hikes, with the RBNZ expected to take rates toward 4.0%.

Australia will publish monthly inflation data for August on Wednesday, with forecasts centred on an annual rise of 4% in headline inflation, picking up from 3.5% in July. Petrol costs have jumped, while underlying inflation remains sticky at 3.6%.

The strength of the US economy is attracting capital and weighing on all currencies, with strong economic growth and weak growth in the labour force contributing to ongoing high inflation. This has further impacted the Australian and New Zealand dollars.

AUD/USD may receive some brief support from a ‘hawkish hike’ by the Reserve Bank on Tuesday.
Joseph Capurso, Head of foreign exchange at the Commonwealth Bank of Australia