SYDNEY: The New Zealand dollar was testing two-year lows on Thursday as a dire business survey underlined the risk that rising interest rates would lead to recession, while the Australian dollar struggled against risk aversion globally.
The kiwi dollar was pinned at $0.6216, having shed 10% for the quarter and coming within a tick of its June trough at $0.6197.
A break there could unleash a further retreat to at least $0.5920 support.
The Aussie was holding on grimly at $0.6893, after slipping as far as $0.6853.
Chart support lies at $0.6850 and its May low of $0.6829. The latest ANZ survey of New Zealand business sentiment made bleak reading with nearly 63% of firms expecting economic conditions to weaken over the coming year.
The main drag was not a lack of demand but rather supply disruptions and surging cost pressures. “In such a supply-constrained environment, it makes sense that inflation pressures are holding up even as the activity outlook slows,” said ANZ chief NZ economist Sharon Zollner.
That meant the Reserve Bank of New Zealand (RBNZ) was likely to stick to its aggressive tightening path even if it meant risking a recession. “While pricing intentions, cost expectations and inflation expectations are all slightly off their peaks, the RBNZ will be looking for meaningful declines,” said Zollner.
Markets are priced for another hike of 50 basis points in July to take rates to 2.50%, and for rates to near 4% by the end of the year.
Over in Australia, the economic news was much stronger but still argued for higher interest rates. Job vacancies jumped 13.8% in the May quarter to hit 480,100, meaning there were almost as many open positions as there were unemployed.
The Reserve Bank of Australia (RBA) often cites the strength of vacancies as reason to be confident that the economy can withstand higher rates.
Markets are thus wagering heavily on another rise of 50 basis points to 1.35% at the RBA’s July policy meeting next week, and for a similar move in August.
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“The RBA now appears intent on front loading the tightening cycle,” said Gareth Aird, head of Australian economics at CBA, who is tipping a half-point hike next week.
However, he doubts rates will ever get to the 4% levels that markets are betting on. “We remain of the view that the neutral rate in Australia is very low given our highly indebted household sector and rate hikes will be powerful.”