Australia, NZ dollars flattened by US$ steamroller, resource rout

SYDNEY: The Australian and New Zealand dollars were heading for heavy weekly losses on Friday as their US counterpart swept all before it, while worries about demand from China and Europe slugged key resource prices.

The Aussie was hanging on at $0.6798, having dived 0.8% overnight to as deep as $0.6771.

That left it down 1.5% for the week and perilously close to the July trough of $0.6683.

The Kiwi crumbled to $0.6086, having fallen 0.7% overnight and to within a whisker of its July low of $0.60615. A break there would take it back to levels not visited since the pandemic chaos of mid-2020.

Commodity prices took a beating as China locked down the important industrial city of Chengdu, while the energy crisis in Europe risked sending the continent into recession.

Australia, NZ dollars hit six-week lows, domestic data a mixed bag

The inexorable rise in the United States only adds to the pressure by making commodities more expensive in domestic currencies.

Australia does have an advantage over Europe by being a net exporter of energy, which has helped support consumer demand and the government’s fiscal position.

High prices for coal and LNG mean the Reserve Bank of Australia’s (RBA) index of commodity export prices is still up 18% for the year so far.

“The economy is reasonably equipped for the global stagflationary shock, given its net energy exporter status and the record high terms of trade,” noted analysts at JPMorgan.

Given that, and a run of recent solid demand data, the US investment bank has revised up its forecast for Reserve Bank of Australia (RBA) tightening and now sees half-point hikes in both September and October.

The central bank meets on Sept. 6 and the market is leaning heavily toward a 50-basis-point move to 2.35% and further hikes to around 3.85% by May.

JPMorgan thinks the RBA will stop at 3.1% in November to gauge how its rapid-fire rises are impacting the economy, which they believe will prove more resilient than expected.

“We maintain our forecast for eventual resumption of hikes in 4Q next year, after a pause that refreshes,” they added.

“In particular, we do not align with consensus/market pricing for cuts next year.” The Reserve Bank of New Zealand (RBNZ) is already at 3.0% and markets imply it will likely get to 4% by year end, with a peak around 4.25% given that the labour market remains very tight.