Morning Brief – Antipodean weakness

Antipodean weakness 

Many of the currencies that would have in years gone by been described as high beta, high yielding currencies, are now carving the way for monetary normalisation. The weakness seen in the Kiwi and Aussie Dollars since the start of the year is further emphasising the changing role of AUD and NZD within the market. Gone are the days of investors seeking access to these markets in pursuit of exceptionally high growth, high interest economies, crowding out market demand. Looking at the market today, data continues to suggest a pause from the RBA and RBNZ could be on the cards. 

In Australia, the inflation reading for May published this month recorded below expectation at 5.6% year-on-year. Month-on-month, inflation was negative. The next RBA decision is scheduled for Tuesday. Looking back at the June decision, which saw the bank publish only a marginal decision to hike, this data will likely be sufficient to usher in a pause to Australia’s interest rate hiking cycle. The RBNZ decision follows one week later and with a dovish hike still ringing in the ears of markets from the last decision, markets will be watching for any signal of the terminal rate having been reached. 

The dovish tilt to both central banks will likely continue to undermine the New Zealand and Australian Dollars. However, as we have seen with other economies that were quick to raise rates and then pause (notably Canada), persistent inflationary pressures could still force the central bank to pursue rate hikes once again. Should that be the case and the recent trend of moderating inflation and inflation-affiliated data be threatened, we could see a rapid reversal in this trend. 

Discussion and Analysis by Charles Porter

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