Australia, NZ dollars gain against yen as BOJ fights on

[SYDNEY] The Australian and New Zealand dollars hit one-week highs against the yen on Wednesday after the Bank of Japan (BOJ) overhauled its massive stimulus programme while recommitting to the fight to lift inflation.

The BOJ decided to adopt a target for long-term interest rates, maintained the 0.1 per cent negative interest rate, abandoned its base money target and set a "yield curve control" under which it will buy long-term bonds to keep 10-year yields at 0 per cent.

It also committed to pushing inflation above its 2 per cent target and keeping it there, a bold step aimed at reviving inflation expectations among firms and households.

In response, the yen fell broadly and the Australian dollar rose 0.7 per cent to 77.40 yen. That was the highest since Sept 12 and its third straight day of gains. The New Zealand dollar added 0.6 per cent to 74.79 yen.

"The most important bit is commitment to overshoot the 2 per cent inflation target," said Divya Devesh, Singapore-based forex strategist at Standard Chartered.

"That's committing to continue easing for longer than previously expected. We think that's dollar/yen positive. Also, markets are a bit relieved given no further cuts to interest rates."

The Aussie was down five ticks on the greenback at US$0.7550, after rising during the past two sessions.

The market will now shift focus to the US Federal Reserve which meets later in the day. Investors widely expect the Fed to stand pat, but will look for indications about future moves.

"Another wimpish 'we're watching the data' and no hike should see a decent bout of 'risk on' and gnashing of the teeth at central banks in Australia and New Zealand as the AUD and NZD rally," wrote Jeffrey Halley, market strategist at Oanda Australia and Asia Pacific.

Among G10 members - the G7 plus Belgium, Netherlands and Sweden - the Aussie and the New Zealand dollar are the best performing currencies this year, up 3.6 and 6.9 per cent respectively. That has forced central banks in both countries to lower rates to restrain their currencies.

On Wednesday, the kiwi fell 0.4 per cent against the US dollar, to US$0.7289.

It got an early morning lift when global dairy prices pushed slightly higher and when dairy giant Fonterra lifted its forecast payout to its farmer shareholders.

The Reserve Bank of New Zealand (RBNZ) holds a policy meeting on Thursday and economists expect rates to remain at a record low of 2 per cent, with a bias to ease further.

New Zealand government bonds gained, sending yields around one basis point lower across the curve.

Australian government bond futures were mixed, with the three-year bond contract up one tick at 98.41. The 10-year contract was down 1.5 basis points at 97.86.

REUTERS