The Australian dollar marked time on Tuesday as the country’s central bank reaffirmed the long-term outlook for steady interest rates, while the New Zealand dollar awaited cues from a policy decision later in the week. Moves were marginal, with the Aussie barely changed on the day at $0.7594. It reached a 10-week top of $0.7636 last week but has since failed repeatedly to sustain a breach of resistance above $0.7630. The New Zealand dollar had steadied at $0.7235, having recoiled from a $0.7298 high on Monday.
Minutes of the Reserve Bank of Australia’s (RBA) June policy meeting showed a heightened sense of concern over financial stability as households struggle with record levels of debt. The Aussie had taken a minor hit on Monday when Moody’s downgraded Australia’s banks by a notch, citing risks from high household debt and a frothy housing market. The central bank has repeatedly warned that cutting rates further would only stoke the borrowing binge in housing. Yet neither is it in any position to tighten as household incomes are already being squeezed by paltry wages growth.
“This highlights the focus of monetary policy at present, with considerations around financial stability trumping almost everything else including sub-target inflation,” said Su-Lin Ong, head of Australian economics at RBC. “The RBA looks set to remain in watch-and-wait mode in the coming months.” Interbank futures imply virtually no chance of a move in the 1.5 percent cash rate this year and only a slight risk of a hike by the middle of 2018.
The U.S. Federal Reserve has already raised rates twice this year and is tipping another, while central banks in the U.K. and Canada have recently taken more hawkish turns. On Monday, New York Fed President William Dudley expressed confidence that U.S. inflation would pick up as forecast and allow another hike in rates later this year. The Reserve Bank of New Zealand holds its rate decision on Thursday and is considered all but certain to keep rates at a record low of 1.75 percent.
Indeed, the central bank’s long term forecasts imply it might not raise rates until late in 2019. New Zealand government bonds were all but steady. Australian government bond futures dipped slightly, with the three-year bond contract off 3 ticks at 98.150. The 10-year contract eased 1.5 ticks to 97.5350.