The Australian and New Zealand dollars strengthened on Monday, July 27, as falling oil prices eased inflation concerns and boosted expectations for interest rate changes. The Australian dollar rose 0.2% to US$0.7001, while the New Zealand dollar gained 0.2% to US$0.5798. These movements followed a stronger-than-expected jobs report in Australia, which led markets to nearly fully price in a fourth interest rate increase from the Reserve Bank of Australia (RBA) this year.
Key Details
Lower oil prices have prompted a reduction in the probability of an RBA rate hike in August to 30%, down from 40%, while the likelihood of a November increase remains around 80%. Paul Bloxham, chief economist at HSBC, noted that if core inflation does not surprise significantly upward, the RBA might hold steady in August. However, he cautioned that inflation remains high, and the jobs market is still perceived as somewhat tight.
Background
Analysts also predict that the New Zealand dollar could rise further against the euro due to expectations that the Reserve Bank of New Zealand (RBNZ) will increase its benchmark rate more aggressively than the European Central Bank (ECB). Strategists from Macquarie Bank Ltd. forecast the kiwi could appreciate by up to 3.2% against the euro over the next three months, as the RBNZ is expected to raise rates by more than a percentage point, compared to about 75 basis points from the ECB.
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The strengthening of the Australian and New Zealand dollars could lead to increased volatility in currency markets, particularly affecting trading pairs involving the US dollar and euro. The outlook for higher interest rates in New Zealand may attract investors seeking higher yields, influencing capital flows into the kiwi.
Watch for the upcoming quarterly inflation data due on Wednesday, which is expected to provide further insights into the RBA's monetary policy stance.