Australia, NZ dollars under pressure as economic risks grow

By Wayne Cole

SYDNEY, March 26 (Reuters) - The Australian and New Zealand dollars were on the defensive on Thursday as rising energy costs from the Middle East war darkened the economic outlook, leaving both currencies close to major support levels.

The Aussie was looking shaky at $0.6940 AUD=D3, having fallen 0.7% overnight in a fourth straight session of losses. A break of support around $0.6897 would risk a retreat to at least $0.6766.

The currency was vulnerable to a pullback as speculators had built large long positions in recent weeks and were forced to sell when key chart levels cracked.

The kiwi dollar had lapsed to $0.5800 NZD=D3, after easing 0.5% overnight. It has chart support at $0.5765 and a breach would open the way to at least $0.5712.

The economic risks from rising energy costs are also becoming clearer, and the outlook is not bright. While Australia is a major exporter of liquefied natural gas and coal, it imports most of its petrol, fertiliser and other refined products.

Petrol prices alone look set to climb around 30% over March and the media is full of reports of dry petrol stations and future rationing.

"While supply disruption suggests downside growth risks – we anticipate rationing – it also gives retailers material pricing power, which they appear to be exercising," said Andrew Ticehurst, an economist at Nomura.

This comes as inflation was already elevated enough to prompt the Reserve Bank of Australia into hiking interest rates in both February and March to reach 4.10%.

"Annual headline CPI could jump to at least 4.5% this month," added Ticehurst. "Inflation in Q2 also appears set to rise by more than we previously forecast, such that an annual CPI rate of around 5% would not be surprising."

RBA Assistant Governor Christopher Kent on Thursday warned a prolonged conflict in the Gulf could weigh on economic growth, but emphasised the central bank had to focus on heading off any pick-up in inflation expectations.

The hawkish tone led markets to nudge up the probability of another rate rise in May to 65%, while a move to 4.35% is fully priced by June. Rates are seen at 4.75% by year-end. 0#AUDIRPR

Wider rate differentials can offer some support to the Aussie, but having to tighten because inflation is spiking also risks fuelling investor fears of stagflation.