SYDNEY: The Australian and New Zealand dollars edged up again on Wednesday after domestic economic news proved less dire than investors had feared, while a sharp unwinding of yen carry trades caused extra volatility.
A reading on the Australian economy showed it grew just 0.1% in the first quarter, as high interest rates and elevated inflation squeezed consumer spending.
Markets, however, had been braced for an outright contraction in the economy so even that tiny gain was enough to prompt short covering in the Aussie.
That helped lift the Aussie 0.2% to $0.6662, recouping some of the previous session’s 0.6% loss. It had climbed as high as $0.6699 on Tuesday before the US currency enjoyed a broad rally.
Markets still doubt the Reserve Bank of Australia (RBA) will cut its 4.35% cash rate anytime soon, with a move in December priced as a 44% chance.
The head of the RBA said earlier in the day that risks for rates and inflation remained balanced, and they were ruling nothing in or out on future policy.
“With inflation digging in its heels, things have gotten a little trickier for the economy this year,” said Harry Murphy Cruise, an economist at Moody’s Analytics, who sees growth of just 1.1% for all of this year.
Australia, NZ currencies hit one-month lows on yen, subdued against US dollar
“We have also lowered our outlook for 2025, with the economy now on track to expand 2.1%, compared with 2.2% in our previous forecast.”
The kiwi dollar added 0.2% to stand at $0.6190, just short of Tuesday’s three-month top of $0.6198.
New Zealand data showed a jump in export volumes for the first quarter and a strong 5.1% rebound in the terms of trade, which should offer some much-needed support to the ailing economy.
Markets are wagering the Reserve Bank of New Zealand will cut its 5.50% cash rate in November, though the bank itself has projected no easing until mid-2025.
Both the Aussie and kiwi were caught by turbulence in carry trades with investors cutting back short positions in the Japanese yen overnight.
Political concerns in Mexico sparked a huge squeeze on long peso/short yen positions, a favourite among carry trades, which rippled through all the yen crosses.
The Aussie had lost as much as 1.4% to 102.57 yen on Tuesday, before bouncing 0.6% on Wednesday.
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