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Australian, New Zealand dollars drift off, RBNZ dovish as inflation slows

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The New Zealand dollar drifted lower on Wednesday after dovish comments from a top central banker outweighed a slight upside surprise on domestic inflation.

[SYDNEY] The New Zealand dollar drifted lower on Wednesday after dovish comments from a top central banker outweighed a slight upside surprise on domestic inflation.

The Australian dollar fared no better in part as speculation a Brexit deal might be near saw the pound surge further to its highest since mid-2016 at A$1.8946, a rise of almost 5 per cent in as many sessions.

The Aussie in turn slipped 0.2 per cent to US$0.6737 and further away from last week's top at US$0.6810. The kiwi eased back to US$0.6280, likewise leaving behind the recent peak of US$0.6317.

The kiwi had briefly rallied when local data showed consumer price inflation rose 0.7 per cent in the third quarter, slightly topping forecasts of 0.6 per cent.

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Annual inflation still slowed to 1.5 per cent, though that was firmer than the Reserve Bank of New Zealand's own forecast of 1.3 per cent.

The result did not stop RBNZ deputy governor Geoff Bascand from saying that further rate cuts might be needed to bolster growth, and again flag the chance of unconventional easing steps such as buying government bonds.

"What's more important for the RBNZ is the trajectory of inflation, and the forward indicators are looking weaker," said Jarrod Kerr, chief economist at Kiwibank.

"Firms are reporting weaker demand, inflation expectations are easing, and core measures of inflation were a touch softer," he added. "We expect the Bank will cut by 25 basis points to 0.75 per cent in November, and eventually take the cash rate down to 0.50 per cent early next year."

The market is pricing in around a 93 per cent chance of an easing at the next policy meeting in November.

Yields on two-year bonds are already down at 0.82 per cent, lower from 1.75 per cent at the start of the year.

Markets are also wagering the Reserve Bank of Australia (RBA) will ease again in the next couple of months, with the timing likely to be affected by September jobs data due on Thursday.

Forecasts favour a solid rise in employment of 15,000, but also for the jobless rate to stay at a one-year high of 5.3 per cent and well above the RBA's aspirational goal of 4.5 per cent.

RBA deputy governor Guy Debelle might expand more on the outlook for rates when he gives a speech on the economy and housing on Thursday morning.

Australian government bond futures were a shade softer on Wednesday, with the three-year bond contract off 1 tick at 99.320. The 10-year contract eased 2.5 ticks to 98.9600.

REUTERS