Australia, NZ Dollars strengthen on expectations of US, EU rate cuts

Dollar in focus: The Australian and New Zealand Dollar experienced upward movement on Friday as investors bet on swift and aggressive interest rate cuts in both the United States and Europe, sparking a substantial rally in local bonds.

Image Credits: Pexels

Despite the positive momentum, the gains were tempered by reports of US and UK strikes on Houthi bases in the Red Sea region, which dampened overall risk sentiment in the markets. 

The Australian Dollar saw a modest increase of 0.2 per cent to $0.6698, recovering from an overnight low of $0.6647, while facing resistance around $0.6735. Similarly, the New Zealand Dollar rose to $0.6240 from a trough of $0.6196 but may encounter challenges breaking resistance at $0.6274.

Both currencies initially slipped following higher-than-expected US inflation figures on Thursday. However, they rebounded as markets speculated on imminent rate cuts.

The implied probability of a Federal Reserve easing as early as March rose to 76 per cent, up from 68 per cent prior to the data release. Concurrently, short-term Treasury yields dropped by 10 basis points.

Local markets followed suit, with Australian three-year bond futures climbing 8 ticks to 96.370 after briefly touching 96.230. 

The Australian Dollar also briefly reached a one-month high against the Euro following dovish comments from European Central Bank (ECB) President Christine Lagarde, reinforcing expectations of an April rate cut.

The Reserve Bank of Australia (RBA) is anticipated to act later, with a 79 per cent probability of a quarter-point cut in June. Futures indicate a total of 50 basis points of easing for 2024, in contrast to the 155 basis points expected for the Federal Reserve.

Recent Australian consumer price data for November surprised on the downside, indicating that inflation for the December quarter might fall below RBA forecasts. 

Nomura economist Andrew Ticehurst predicts a sharp decline in the core trimmed mean inflation measure to 4.2 per cent in the fourth quarter, down from 5.2 per cent in the previous quarter. 

Ticehurst forecasts three 25 basis points rate cuts from August to November this year, bringing the cash rate to a roughly neutral 3.60 per cent by late 2024.

In New Zealand, markets are speculating that the Reserve Bank of New Zealand (RBNZ) will likely ease in May, considering the possibility of the country already being in recession, with a projected 90 basis points cut over the year.

(With Reuters Inputs)