Australian, New Zealand dollars struggle near two-year lows, data on help

THE Australian dollar and New Zealand dollars wallowed near two-year lows on Thursday as their US counterpart caught an updraught from lofty Treasury yields, while domestic data disappointed high expectations.

Figures showed Australian retail sales rose a solid 0.8 per cent in November as Black Friday discounting attracted frugal shoppers, but that missed market forecasts of a 1.0 per cent increase.

Anyway, analysts merely assumed the extra spending was just brought forward from Christmas and sales would retreat in December.

That should be no hurdle to a February cut in interest rates, given data had already shown core inflation slowed more quickly than expected in November.

Analysts were busy revising down their fourth-quarter forecasts for the core trimmed mean measure of inflation, with CBA trimming theirs to 0.5 per cent from 0.6 per cent.

That would be the smallest rise since mid-2021 and would imply a six-month annualised pace of just 2.6 per cent, well within the Reserve Bank of Australia‘s 2-3 per cent target band.

Nomura economist Andrew Ticehurst is tipping a quarterly rise of only 0.4 per cent, which would be a green light for easing.

“We previously assigned a ~60 per cent probability to a first 25bp RBA easing in February, and think this has now likely risen to at least 70 per cent,” he said.

“Our base case remains for rate cuts in February, May and August, returning the cash rate to a ‘neutralish’ 3.60 per cent.”

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Markets imply around a 75 per cent probability of a quarter point reduction in the 4.35 per cent cash rate next month and also see rates around 3.60 per cent by the end of the year.

At the same time, investors have scaled back expectations for US easing and see rates there bottoming around 3.90 per cent.

That outlook kept the Aussie pinned at US$0.6200, uncomfortably close to its recent trough of US$0.6179. Bears are focused on the 2022 low of US$0.6170, where a breach would take the Aussie to depths not seen since the 2020 pandemic.

The kiwi was struggling at US$0.5596, within a whisker of the recent low of US$0.5588. Its 2022 trough is down at US$0.5512.

Markets are wagering the Reserve Bank of New Zealand will chop its 4.25 per cent cash rate by 50 basis points when it meets on Feb 19, and take rates to 3.0 per cent by the end of 2025.