AUD/NZD dives to near 1.0800 as RBA maintains interest rate at 4.1%

• AUD/NZD has displayed a vertical fall as RBA left interest rates unchanged.
• The recent decline in monthly CPI to 5.8% provided strength to RBA policymakers to maintain the status quo.
• NZ inflation is not showing signs of easing while the economic outlook has dampened extremely.

The AUD/NZD pair has witnessed an intense sell-off to near the round-level support of 1.0800 as the Reserve Bank of Australia (RBA) has left interest rates unchanged at 4.10%. As per the expectations, investors were mixed between a steady interest rate decision and a small hike of 25 basis points (bps) to 4.35%.

It looks like the recent decline in the monthly Consumer Price Index (CPI) provided strength to RBA policymakers to maintain the status quo. Investors should note that Australia’s monthly CPI softened heavily to 5.6% in May from a prior pace of 6.8%. A sheer decline in gasoline prices released severe heat from red-hot inflation in Australia and provided a luxury to RBA Governor Philip Lowe to remain light on monetary policy.

Meanwhile, labor market conditions in Australia are still solid amid an overall upbeat demand. The Unemployment Rate dropped to 3.6% in May vs. the former figure of 3.7%.

No doubt, price pressures in the Australian region are far from the desired rate of 2%, a steady interest rate policy would buy some time for RBA policymakers to assess interest rate hikes yet made in achieving price stability. Investors should understand that further rate hikes cannot be ruled out. Financial markets are anticipating that RBA’s Official Cash Rate (OCR) would peak around 4.6%.

On the New Zealand Dollar front, inflation is not showing signs of easing while the economic outlook has dampened extremely. The Reserve Bank of New Zealand (RBNZ) has already pushed its OCR to 5.50% and more rate hikes are in the pipeline.