Key Takeaways
- Australian dollar rises after Reserve Bank of Australia's hawkish stance.
- Investors expect RBA to hike cash rate by 25 bps to 4.60% later this month.
- New Zealand dollar falls as Reserve Bank of New Zealand's rate hike was less hawkish than expected.
The Australian dollar strengthened on Friday, buoyed by the Reserve Bank of Australia's (RBA) hawkish stance on inflation and interest rates. Governor Michele Bullock, appearing before lawmakers, highlighted the materialisation of upside risks to inflation, indicating that the RBA board is considering whether current policy is tight enough to address these risks.
Economist Andrew Boak from Goldman Sachs expects the RBA to hike its cash rate by 25 basis points to 4.60% later this month, with a further hike in November remaining a material risk. This expectation has nudged the chance of a September hike to 95%, with a 4.85% rate almost fully priced by February.
The Australian dollar gained 0.2%, closing at $0.7126, after bouncing almost 0.4% overnight. Despite this, it remains down 0.6% for the week, facing resistance around $0.7140 and $0.7187. The currency was also supported by a 1% increase in the yen to 111.78, following the Bank of Japan's rate hike.
In contrast, the New Zealand dollar struggled, easing 0.2% to $0.5717 for the week, bringing its losses to 1.6%. The Reserve Bank of New Zealand's rate hike to 2.75% earlier this month was less hawkish than expected, contributing to the kiwi's decline. Support for the kiwi lies at a 10-week trough of $0.5705, with resistance at $0.5762.
The Australian dollar took advantage of the kiwi's troubles, climbing 1% on the week to NZ$1.2446, levels not seen since early 2013. This gain was particularly significant given the New Zealand dollar's ongoing slide, which began after the Reserve Bank of New Zealand projected a slower and more limited tightening cycle than markets had anticipated.
Data released on Friday showed softer-than-expected prices, especially for holiday accommodation, suggesting that consumer price inflation for the third quarter may come in below the Reserve Bank of New Zealand's forecast of 3.9%. Markets now imply a 60% chance of a rate hike at the Reserve Bank of New Zealand's next meeting on October 28, making the timing politically sensitive as it coincides with a national election.
The Australian dollar's strength and the New Zealand dollar's weakness reflect the divergent monetary policies and market expectations in the two countries. As the RBA remains hawkish, the Australian dollar is likely to continue to benefit from this stance, while the New Zealand dollar faces challenges due to the Reserve Bank of New Zealand's less hawkish approach.
