Australian Dollar weakens as hawkish RBNZ lifts New Zealand Dollar

Finance

Australian Dollar weakens as hawkish RBNZ lifts New Zealand Dollar

AUD/NZD depreciates for the third successive day, trading around 1.2020 during the Asian hours on Friday. The currency cross loses ground as the New Zealand Dollar (NZD) finds strong support amid growing hawkish sentiment surrounding the Reserve Bank of New Zealands (RBNZ) policy outlook.

According to Reuters, RBNZ Governor Anna Breman stated on Friday that interest rates are likely to increase sooner and by more than previously signaled to combat persistent inflation. While the central bank decided to keep the Official Cash Rate (OCR) on hold at 2.25% during its May meeting on Wednesday, the decision revealed a deeply divided board, with three members voting for an immediate quarter-point hike and three voting to maintain the status quo.

Further reinforcing the New Zealand Dollar‘s strength is an uptick in domestic confidence data. The ANZ-Roy Morgan Consumer Confidence Index rebounded to 86.5 in May, climbing from April’s reading of 80.3, which had marked its lowest level since May 2023. Although the index has managed to recover 6 points over the past month, it still remains notably down by 21 points from its peak in January, suggesting that while local consumer sentiment is recovering, it is doing so from a deeply depressed baseline.

In contrast, the Australian Dollar (AUD) is struggling against the New Zealand Dollar as markets sharply scale back expectations for further interest rate hikes by the Reserve Bank of Australia (RBA).

Investors are reacting to a series of economic indicators suggesting that earlier RBA monetary tightening is successfully filtering through the Australian economy. A softer-than-expected April inflation print, combined with weak consumer spending data and recent signs of a cooling labor market, has prompted market participants to aggressively cut the odds of a June rate hike, dragging the Australian Dollar lower.