SYDNEY: The Australian and New Zealand dollars were becalmed on Friday as a US holiday drained the market of liquidity, while investors pondered a diverging outlook for rates which is set to see Australia hold out for some more time.
In a hawkish speech on Thursday, Reserve Bank of Australia (RBA) Governor Michele Bullock made it clear there was no prospect of a rate cut in the near term.
“We do not rule out a rate cut in February, but that would require either the data between now and then to print on the downside or the Board to act more pre-emptively than its current language suggests,” said Adam Boyton, head of Australian economics at ANZ.
“We are shifting our view on the start of the RBA’s easing cycle from February to May,” he added.
“We now also only expect two 25bp rate cuts in total, instead of three.”
An added wrinkle was the passage of RBA reforms that could lead to changes in the composition of the policy setting board.
All of which has markets pricing in less than a 10% chance of a cut in the 4.35% cash rate at the next meeting on Dec. 10, and a 20% probability of a move in February.
A quarter-point cut is not fully priced in until May and rates are seen ending 2025 at 3.85%.
Across the Tasman, the Reserve Bank of New Zealand has already chopped rates by 125 basis points to 4.35% and markets imply rates will reach 3.33% late next year.
Australia, NZ dollars find support, market ponders rate outlook
The drag from rate differentials saw the kiwi touch a one-year low early this week at $0.5797, before a short-squeeze helped it rally to the current $0.5890. The Aussie was flat at $0.6505, and steady for the week, having hit a four-month trough of $0.6434 at one stage.
Both currencies have been badly buffeted by US President-elect Donald Trump’s threats of tariffs on China, Mexico and Canada, amongst others.
Australia and New Zealand are heavily reliant on trade, which accounts for around half of their annual economic output.
They are also major exporters to China and exposed to any economic weakening caused by potential US tariffs.
That is one reason the Aussie is often sold as a liquid proxy for the yuan.
“If part of China’s response to higher US tariffs is to allow its currency to weaken, there is direct feedthrough to the AUD,” noted Ray Attrill, head of FX strategy at NAB.
“The risks are such that we would not be surprised to see AUD/USD trade with a ‘5’ in front of it at some point next year,” he said.
“This largely depends on the severity of the hit to global growth from Trump 2.0 trade policies, and what happens with the yuan.”
American Dollar Exchange Rate