Australian, New Zealand dollars hold firm, domestic stimulus long priced in

[SYDNEY] The Australian and New Zealand dollars stayed firm on Tuesday as market priced in aggressive cuts in US interest rates, even as events at home suggested domestic policy would likely be eased again in coming months.

The Aussie dollar held at US$0.7036, having earlier tested major chart resistance at US$0.7048. A break there would take it to ground not trod since the start of May and set up a challenge of the next chart barrier at US$0.7069.

The kiwi edged up to US$0.6734, just a whisker from its June top of US$0.6737. A breach would see it reach three-month highs with the next target at US$0.6782.

The currency was aided when domestic inflation figures came in much as expected, dodging the risk of a downside surprise.

Consumer prices rose 0.6 per cent in the June quarter, from the previous quarter, nudging annual inflation up to 1.7 per cent from 1.5 per cent.

However, half of the pick up was due to rising petrol prices, which had since levelled off, and inflation was subdued elsewhere.

As a result, investors continued to wager the Reserve Bank of New Zealand would cut rates at its next policy meeting on Aug 7, particularly as the Fed was expected to ease a few days earlier.

"Low global inflation and competitive pressures continue to hold down prices for imported goods," said Westpac senior economist Michael Gordon.

"Concerns about slowing domestic growth and the uncertain global environment meant that the RBNZ had already judged that a further OCR cut was "likely"," he added. "Today's report will do nothing to change that stance."

Minutes of the Reserve Bank of Australia's (RBA) July meeting showed it also stood ready to ease again "if needed" to support employment and economic growth.

The bank cut its rates to a record low of 1 per cent early this month and futures markets are fully priced for another move to 0.75 per cent by early next year. "Downside risks to the economy are continuing, including soft consumer spending, a deterioration in business conditions and a more uncertain global outlook," said Janu Chan, a senior economist at St. George Bank.

"The RBA is therefore expected to pull the rate cut trigger once again. We continue to favour the timing of such a move in November, but cannot rule out the RBA moving earlier."

Bonds remain priced for an easing with yields on three-year paper down at 0.958 per cent and under the cash rate. The 10-year futures contract firmed 6.5 ticks on Tuesday to 98.6050, implying an yield of 1.395 per cent.

New Zealand's two-year yields dipped back to 1.175 per cent, from a top of 1.22 per cent on Monday.

REUTERS