The Business Times

Australian, New Zealand dollars near 2-1/2 year lows amid risk flight

Published Mon, Sep 19, 2022 · 11:00 AM

THE Australian and New Zealand dollars were facing another tough week on Monday, with a raft of central banks likely to raise interest rates and test risk appetites globally.

The Aussie was idling at US$0.6721, having shed 1.8 per cent last week to touch a 2-1/2 year trough of US$0.6670.

The break of the July low of US$0.66825 was a bearish development that targeted a retracement level around US$0.6460. The kiwi was lying at US$0.5986, after sinking 1.9 per cent last week to as deep as US$0.5940.

The next support is US$0.5921, a low from May 2020.

Both commodity-sensitive currencies have been undermined by fears that drastic policy tightening by major central banks will tip the world into recession and damage demand.

The US Federal Reserve is expected to hike rates by at least 75 basis points on Wednesday, while central banks in Britain and Switzerland are also likely to move this week.

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All this tightening has increased pressure on the Reserve Bank of Australia (RBA) to follow and raise rates by another 50 basis points to 2.85 per cent in October.

RBA Governor Philip Lowe last week flagged the chance of a slowdown in hikes at some point, but also underlined the importance in a very tight labour market of keeping inflation expectations anchored.

“The remarks and commentary on ‘inflation psychology’ was more hawkish than we expected,” said Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities.

“Accordingly, we now expect the RBA to hike 50bps at its October meeting and retain 25bps hikes for the Nov, Dec and Feb ‘23 meetings, taking our terminal cash forecast from 3.35 per cent to 3.60 per cent.”

Futures are leaning toward a half point hike for October and a peak rate as high as 3.85 per cent.

Minutes of the RBA’s September policy meeting will be published on Tuesday, and RBA Deputy Governor Michele Bullock will give a speech on Wednesday.

The Reserve Bank of New Zealand (RBNZ) is widely expected to lift rates by 50 basis points in October, and the market has added an extra 25 basis points to the profile to take the peak rate to almost 4.50 per cent.

“An inflation rate back at target is the end goal and achieving this will require a slowdown in domestic demand,” said Jarrod Kerr, chief economist at Kiwibank.

“The RBNZ has clearly signalled that further increases to the cash rate are needed,” he added.

“We expect the fifth successive 50bps hike at the monetary policy review in October and we see the cash rate reaching 4% by the end of the year.” REUTERS

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