The Australian and New Zealand Dollars rebounded from earlier losses on Thursday as a sharp shift in global market sentiment boosted risk assets, outweighing weaker-than-expected domestic economic figures.
Traders pointed to optimism about the potential restart of oil flows through the Strait of Hormuz and the possibility of renewed discussions between the United States and Iran, although considerable uncertainty remained.
The Australian Dollar rose to $0.7078 after gaining 0.6% overnight, recovering from a low of $0.6985. Developments in the Middle East have driven the currency between $0.6945 and $0.7122 so far this week, and further volatility appears likely.
Meanwhile, the New Zealand Dollar was steady at $0.5940 following a 0.9% overnight increase from a low of $0.5861. Key support is seen at $0.5837, while resistance levels are positioned at $0.5954 and $0.6012, Reuters reports.
“If the US-Israel-Iran conflict proves short lived, then positive AUD fundamentals should quickly reassert,” stated Ray Attrill, head of FX Strategy at NAB.
“But any signs that the conflict turns into drawn-out affair leaves AUD vulnerable to the downside. A move above $90 for WTI crude or close to $100 for Brent could be a trigger for a much bigger risk off event.”
Domestic data indicated that Australian household spending increased by just 0.3% in January, following a 0.5% decline the previous month, pointing to a slowdown in consumer demand.
This may ease worries at the Reserve Bank of Australia (RBA) that demand was exceeding the economy’s productive capacity and prompting the need for additional interest rate hikes.
Data released on Wednesday showed the economy accelerated in the December quarter, adding to inflationary pressures, though there were also indications of improved productivity and a slowdown in labour cost growth.
Consequently, markets are pricing just a 20% probability that the central bank will raise its 3.85% cash rate at the upcoming 17th March meeting, while fully anticipating a rise to 4.10% by May.
“We still expect the RBA to lift the cash rate in May and stay on hold in March, but a lively debate is expected,” according to Belinda Allen, head of Australian economics at CBA.
“Dependent on the duration and severity of the Mid East conflict, the clear risk sits with the RBA having to lean further against inflation,” she added.