Australia, NZ Dollars long for clarity on US rates, recession risk

The Australian and New Zealand Dollars held still on Friday ahead of US jobs data that should help clarify the risk of recession and the pace of rate cuts there, ensuring major fallout for global risk assets. The Aussie was flat at $0.6739 AUD=D3, having eased 0.4 per cent for the week. Support comes in at $0.6684 and $0.6617, while resistance stands at $0.6792 and $0.6823.

The bigger turnaround came against the safe haven yen as the Aussie is down 2.3 per cent for the week at 96.60 . The kiwi Dollar stood at $0.6221, to also be down 0.4 per cent for the week. Resistance lies at last week's top of $0.6298, with support around $0.6168 and $0.6129.

The near-term direction depends on the payrolls report as a run of softer data suggests the risks are to the downside, and a weak outcome would stoke speculation of an outsized rate cut from the Federal Reserve on Sept. 18.

The Reserve Bank of Australia (RBA), in contrast, is going out of its way to dissuade the market from pricing in cuts this year, arguing demand in the economy is still running ahead of supply. It has had mixed success, with the market implying a 38 per cent chance of a quarter-point cut in November and an 83% probability for December. 

For the next 12 months, the market has 82 basis points of cuts pencilled in, compared with 228 basis points for the Fed.

"We caution against placing too much weight on the RBA's current emphasis on a positive output gap, and expect that narrative to fade alongside expected softer trends in inflation and the labour markets," said Andrew Boak, an economist at Goldman Sachs. "Our base case remains for the RBA to delay starting the easing cycle to February 2025, but we see the balance of risks as skewed towards an early adjustment."

The Reserve Bank of New Zealand (RBNZ) is fully expected to cut its 5.25 per cent cash rate again in October, with swaps implying a 41% chance of a half-point move.  Yet, last month's easing has already had such an impact on the mood of consumers and business that the urgency for an outsized easing has diminished.

"The massive lift in confidence, in our view, lowers the chance for any 50bps cuts, as currently priced in the market," said Jarrod Kerr, chief economist at Kiwibank. "Our view is unchanged; we expect to see a steady glidepath down in the cash rate," he added. "We forecast another eleven 25bp cuts to 2.5% from the RBNZ into 2026."