Australia, New Zealand dollars climb as oil slide eases rate concerns

[SYDNEY] The Australian and New Zealand dollars strengthened on Monday (Jul 27) as hopes for a diplomatic solution to the Middle East conflict sent oil prices lower, easing inflation concerns and boosting global bond markets.

The Aussie rose 0.2 per cent to US$0.7001, after gaining 0.3 per cent on Friday, leaving it little changed for last week. It has continued to move away from a three-month low of US$0.6867, with resistance seen at the one-month peak of US$0.7026.

The New Zealand dollar added 0.2 per cent to US$0.5798 after ending last week down 1 per cent, weighed mainly by losses against its Australian counterpart. Resistance is now seen at the 200-day moving average of US$0.5822.

Against the kiwi, the Aussie was up 0.1 per cent at NZ$1.2068, after rallying 1 per cent last week. The gains were supported by a stronger-than-expected jobs report that led markets to almost fully price in a fourth interest-rate increase from the Reserve Bank of Australia this year.

Investor focus will shift to quarterly inflation data, due on Wednesday, where economists expect the trimmed mean measure of core inflation to rise 0.9 per cent in the second quarter, lifting the annual rate to 3.7 per cent. That would remain above the RBA’s 2 to 3 per cent target band, but below the central bank’s forecast of 3.8 per cent.

“Assuming no significant upside surprise to core inflation this week the RBA should be able to hold steady in August,” said Paul Bloxham, chief economist at HSBC.

“However, inflation is still too high, and the jobs market is still likely to be deemed to be ‘a little tight’, despite loosening. The board could still judge that more tightening is needed.”

Lower oil prices prompted markets to trim the probability of an RBA rate hike next month to 30 per cent from 40 per cent, while a November increase remains around 80 per cent priced in. RBA Governor Michele Bullock is due to speak on Tuesday and could strike a hawkish tone given the recent escalation in the Gulf conflict.

Australian government bonds recovered after heavy losses last week. Three-year bond yields fell 9 basis points to 4.635 per cent, after surging 23 basis points last week, while 10-year yields dropped 7 basis points to 5.015 per cent.

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In New Zealand, the key two-year swap rate dropped 6 bps to 3.7219 per cent, after jumping 20 bps last week.

The Reserve Bank of New Zealand raised rates to 2.5 per cent earlier this month and markets now expect to see 3 per cent by December, and 3.5 per cent by the middle of next year. REUTERS