Australian dollar scales 3-month peak, New Zealand dollar follows as rate risk shifts

[SYDNEY] The Australian and New Zealand dollars firmed on Thursday as investors scaled back wagers on local interest rate cuts after the US Federal Reserve signalled a pause in its easing campaign.

Some solid domestic data on housing and trade also helped offset disappointing readings on Chinese manufacturing and services activity.

The Aussie reached a three-month top at US$0.6928, having been as low as US$0.6849 at one stage on Wednesday. In a bullish technical development, it also cleared major resistance at the September high of US$0.6895.

The kiwi dollar popped up to US$0.6424, leaving behind Wednesday's low of US$0.6335, though it still faced tough resistance at the October peak of US$0.6436.

It got a helping hand when Westpac economists changed their call on New Zealand interest rates, now expecting no cut at the Reserve Bank of New Zealand's (RBNZ) policy meeting on Nov 13.

The bank, like much of the market, had thought the RBNZ was odds-on to cut its cash rate by 25 basis points to 0.75 per cent, but a run of better domestic economic data and an improvement in global market sentiment changed the balance of risks.

Also influential was the Fed's decision to move to a more neutral stance after it cut rates as expected on Wednesday.

"US and Australian central banks are suggesting that they have cut rates far enough for now," wrote Dominick Stephens, Westpac's chief economist for New Zealand, in a note.

"However, we do expect the RBNZ will remain open to the possibility of future cuts, depending on how the data evolves," he added. Westpac now expects an easing in February.

The market now implies around a 54 per cent chance of a November easing, down from more than 80 per cent early this month.

Investors have also been lengthening the odds on a move from the Reserve Bank of Australia (RBA) in the near term.

Futures imply almost no chance of a quarter-point cut in the 0.75 per cent cash rate at the RBA's policy meeting on Nov 5, and only a 24 per cent probability of a move in December.

The RBA has repeatedly noted that the trend to lower rates by other major central banks had added to the pressure for cuts at home, so the Fed's pause may give it some breathing room.

Local data also suggested the three easings already delivered were helping the residential construction sector, with approvals to build new homes jumping 7.6 per cent in September.

That was the biggest gain in seven months and held out hope activity might at least stabilise after a year of decline.

Other figures showed prices for Australia's exports rose a surprisingly strong 1.3 per cent in the third quarter, topping a 0.6 per cent increase in import prices and adding to economic growth.

Yields on three-year paper drifted up to 0.80 per cent, having hit an historic low of 0.60 per cent early in the month, while 10-year bonds pay 1.12 per cent.

The three-year bond futures contract dipped 1.5 ticks to 99.205, while the 10-year contract was flat at 98.8600.

REUTERS