Australian, New Zealand dollars suffer relapse as China clouds outlook

THE Australian and New Zealand dollars eased back on Tuesday as US stock futures swung lower and markets struggled to shake concerns about China’s economy, continuing the recent see-sawing in risk sentiment. The Aussie faded 0.5 per cent to US$0.7075, and away from a two-week top of US$0.7126 touched overnight. A break under US$0.7070 could see it all the way back to US$0.7005 support. The kiwi dollar also slipped 0.5 per cent to US$0.6433, surrendering an overnight high of US$0.6490. Support now lies around US$0.6415. While pledges of more stimulus from China’s government have led to hopes for an economic rebound, its adherence to a zero-Covid-19 policy has already done much damage. “The government’s dynamic zero-Covid policy will remain in place through 2022, preventing a return to normalcy and limiting the effectiveness of new fiscal and monetary stimulus measures,” warned S&P Global. “Thus, real GDP growth will likely slow from 8.1 per cent in 2021 to 4.3 per cent in 2022.”

“New geopolitical, financial, or supply-side shocks could tip the world economy into recession.” That was not a favourable outlook for the major resource exporters, especially when domestic interest rates were having to be lifted to fight inflation. The Reserve Bank of New Zealand is widely expected to raise its policy interest rate by 50 basis points to 2.0 per cent on Wednesday and to project more tightening to come. That comes despite signs the economy is cooling with retail sales falling a real 0.5 per cent in the first quarter, when most analysts had looked for a solid increase. “The softer than anticipated retail spending result signals downside risk to our forecasts for a 0.6 per cent rise in March quarter GDP,” said Westpac senior economist Satish Ranchhod. “The rise in consumer prices is squeezing households’ spending power, while the rise in mortgage rates and related debt servicing costs will add to the pressures on discretionary incomes.”

So far, consumer spending seems to have held up well to the Reserve Bank of Australia’s (RBA) first hike in interest rates earlier this month, keeping it on track to move again in June. Markets are priced for quarter-point rises in the 0.35 per cent cash rate in both June and July, and a half-point hike in August following what is likely to be another alarming inflation report. RBA Assistant Governor Luci Ellis is due to speak on Wednesday and could expand on the central bank’s own outlook for policy. AFP