Australian, New Zealand dollars edge higher, odds narrow on RBNZ hike

[SYDNEY] The Australian and New Zealand dollars were a little firmer on Thursday after a slight cooling in US inflation restrained the greenback, while a high reading for domestic inflation expectations underpinned the kiwi.

The Aussie dollar stood at US$0.7363, after bouncing from a low of US$0.7316 early in the week, which now acts as chart support. Resistance lies at US$0.7390 and US$0.7415 and a break above US$0.7427 is needed to improve the technical background.

The kiwi dollar held at US$0.7038 having risen 0.5 per cent overnight and away from the week's trough of US$0.6969. It faces resistance at US$0.7060 and US$0.7088.

A closely-watched survey of inflation expectations from the Reserve Bank of New Zealand (RBNZ) showed a sharp rise on a one-year horizon to 3.02 per cent, from 1.87 per cent.

That was the highest reading since 2010, but mainly reflected an already reported jump in consumer prices.

Inflation expectations for two years out firmed to 2.27 per cent, from 2.05 per cent, the highest since 2014 and another reason the RBNZ might decide to raise its 0.25 per cent cash rate (OCR) at a policy meeting next week. The central banks aims to keep inflation in a 1-3 per cent band with a central target of 2 per cent.

However, longer term expectations for five and 10 years did remain anchored at 2.0 per cent, suggesting less need for an aggressive half point hike in rates.

Markets are fully priced for a rise to 0.5 per cent, and imply around a 27 per cent chance of a larger move to 0.75 per cent.

A surprisingly strong economic recovery, rapidly falling unemployment and a red-hot housing market have all combined to set the stage for an unwinding of stimulus by the RBNZ.

Home prices were up 25 per cent on a year ago in July at a record peak after months of torrid growth.

"The heat from the housing market is getting a little too hot to handle," said Jeremy Couchman, a senior economist at Kiwibank.

"High-risk debt continues to build so financial stability concerns have pushed the RBNZ to act," he added. "The RBNZ is set to deliver the first in a series of rate hikes next week and macro-prudential policy is being tightened further."

In Australia, the economy has been undermined by the spread of the Delta variant, which triggered a lockdown in the capital of Canberra on Thursday, the first in more than a year.

The spread of lockdowns has made policy tightening in Australia a distant prospect and pulled 10-year bond yields down to 15 basis points below US yields at 1.20 per cent.

REUTERS