Australian Dollar Climbs As Rate Cuts Look Likely In New Zealand

What’s going on here?

The Australian dollar (AUD) has been flexing its muscles against both the New Zealand dollar (NZD) and the US dollar (USD), driven by speculation that the Reserve Bank of New Zealand (RBNZ) will soon cut interest rates.

What does this mean?

The AUD reached NZ$1.0923 against the kiwi and climbed 0.6% against the USD, hitting $0.6558. Meanwhile, the NZD rose to $0.6002 after dipping to $0.5849 earlier in the week. Market chatter suggests the RBNZ might cut rates as soon as August 14, following a drop in the two-year inflation outlook to 2.03% from 2.33%, which falls within their target range. Economists at Westpac predict that these low readings, typically seen when actual inflation is below 2%, will lead to early rate cuts, potentially starting in October. Swaps indicate an 81% chance of a 25 basis point cut at the upcoming meeting, up from 48% earlier in the week.

Why should I care?

For markets: Diverging paths for down under neighbors.

The gap in monetary policies between the RBNZ and the Reserve Bank of Australia (RBA) is widening. While market bets on an RBA rate cut by November have dropped to 48% from 88% earlier in the week, expectations for RBNZ cuts are peaking. Westpac has moved its forecast for the RBA’s first cut to February 2024. Analysts at ANZ concur, and National Australia Bank predicts the RBA will wait until May next year. This divergence between the RBNZ’s likely imminent cuts and the RBA’s more distant timeline has bolstered the AUD against the NZD.

The bigger picture: Global sentiment lifts the Aussie.

The rise in the AUD isn’t solely about local central banks. Positive sentiment in global equity markets has also buoyed the Australian currency. As investors grow more optimistic, they often look to currencies tied to strong equity market performance, like the AUD. This dual tailwind of diverging central bank policies and upbeat global market sentiment has positioned the AUD for potential continued strength against both the NZD and the USD.