The ongoing geopolitical tensions between the US and Iran have sent ripples through the financial markets, with the Australian and New Zealand dollars feeling the impact. As oil prices surge due to the escalating conflict, the focus shifts to the economic implications for these two nations.
The Impact on Currency
The Australian dollar, or the 'Aussie', has seen a brief respite, recovering from a four-day low. This recovery is attributed to the recent 0.5% gain, with resistance at the three-week top. Meanwhile, the New Zealand dollar, also known as the 'kiwi', experienced a similar dip but managed to recoup its losses, remaining flat.
Inflation and Rate Hikes
The Reserve Bank of New Zealand (RBNZ) has indicated a hawkish stance, with potential rate hikes on the horizon. The upcoming inflation data, expected to show a jump to 4% in Q2, will be a key indicator. Non-tradeable inflation, in particular, will reveal if rising fuel costs are affecting domestic prices.
Jarrod Kerr, chief economist at Kiwibank, believes a lower inflation print could mean fewer rate hikes this year. Conversely, a higher print may lead to an aggressive hike to 3% by year-end. Markets are currently pricing in a 78% chance of a September rate hike, with rates potentially peaking at 3.5% mid-next year.
Market Sentiment and Oil Prices
The spike in oil prices has influenced market expectations, with a 76% chance of another rate hike from the Reserve Bank of Australia (RBA) by December. This expectation has helped the Aussie rebound against the kiwi.
Employment Data and Market Expectations
Traders are now awaiting Australian employment data, due on Thursday. Any unexpected weakness in the data could prompt markets to adjust their expectations for another rate hike.
Conclusion
The geopolitical tensions and their impact on oil prices have created a complex scenario for central banks in Australia and New Zealand. The upcoming inflation and employment data will provide crucial insights, shaping the trajectory of interest rates and, consequently, the strength of their currencies. Personally, I find it fascinating how global events can have such a direct and immediate impact on local economies, and it's a reminder of the interconnected nature of our world.
