Soaring Inflation Means More Aggressive Moves by RBA, RBNZ

The Australian and New Zealand Dollars closed lower last week with the bulk of the selling taking place on March 7 and March 8 as wild swings in crude oil prices made for volatile market conditions and analysts revised up expectations for rate hikes at home.

Last week, the AUD/USD settled at .7294, down 0.0081 or -1.10% and the NZD/USD finished at .6812, down 0.0049 or -0.72%. The Invesco CurrencyShares Australian Dollar Trust ETF (FXA) closed the week at $72.28, down $0.87 or -1.19%.

Aussie, Kiwi Investors Worried High Oil Prices Will Hurt Economic Growth

While the Aussie and Kiwi were still drawing support from extremely high commodity prices, they also act as a tax on global consumers and a deterrent on world growth that might not be positive for risk-sensitive currencies in the longer run. Translation: Soaring commodity costs could backfire on the Australian and New Zealand economies if consumers stop spending because of high prices.

JPMorgan, for instance, now sees global growth slowing to 2.6% in the first half of this year compared to a forecast of 4.9% just three weeks ago. Inflation will also be markedly higher, something locals are already experiencing as gasoline spikes to record highs.

Analysts Expect RBA to Hike Rates Earlier than Previously Forecast

In Australia, NAB has brought forward the expected timing of a first rate hike to August from November, and a further two moves to 0.75% by year end. It sees the cash rate peaking around 2.25% in late 2024.

The futures market has already narrowed the odds on a hike as early as June, following what is likely to be a very strong March quarter consumer price report.

“The change in our view comes alongside an upgrade to our domestic forecasts,” said NAB chief economist Alan Oster.

“We now see the unemployment rate below 4% by March, well ahead of RBA expectations, and core inflation at around 3.75% by mid-year compared to the RBA’s 3.25% forecast.”

NAB’s business survey out on Tuesday showed activity had recovered quickly in February, from January’s Omicron-driven setback.

The outlook for inflation sent three-year yields surging to their highest since early 2019 at 1.65%. Yields on 10-year bonds climbed to 2.19%, putting them a wide 42 basis points above Treasuries.

Inflationary Pressures May Force RBNZ to Make Aggressive Moves

The building inflationary pressures are so great that ANZ now expects the Reserve Bank of New Zealand (RBNZ) will have to hike its benchmark 1.0% cash rate by 50 basis points at both its April and May policy meetings. Last week, the financial futures markets implied around a 50-50 chance of a half-point move in April, and only see rates around 1.70% in May.