Australia, NZ dollars brace for US rate outlook to make waves

SYDNEY: The Australian and New Zealand dollars were in a pensive mood on Wednesday awaiting developments on US inflation and interest rates that could cause waves in currency and bond markets.

The Aussie inched up 0.1% to $0.6613, having barely moved over the previous 24 hours. Support lies at the week’s low of $0.6576, with resistance at $0.6615 and $0.6681.

The kiwi dollar was a fraction firmer at $0.6142, having crept up from a low of $0.6100 at the start of the week. Resistance is up at the recent three-month top of $0.6215.

Chinese inflation data missed forecasts with consumer prices falling 0.1% in May, though with mixed implications as it underlined the softness of domestic demand, while also adding to the case for more stimulus.

That was just a taster for the US consumer price report which is expected to show a smaller rise of 0.1% for May, with the core up 0.3%.

The range of forecasts suggests the risk for the core leans to the downside, which would be a relief to markets and the Federal Reserve.

However, the Fed’s policy meeting is likely to see its dot plot projections for rate cuts this year reduced from three to two, and perhaps even one.

Australia, NZ currencies hit one-month lows on yen, subdued against US dollar

Markets have already scaled back expectations for easing this year to 39 basis points - it was well over 100 basis points back in January - but a hawkish Fed outlook would still put upward pressure on bond yields and the US dollar.

Such an outcome would also support market wagers that the Reserve Bank of Australia (RBA) will not be easing for some time to come.

The central bank meets next week and is considered certain to hold rates at 4.35%, while reiterating that it is not ruling out further hikes if necessary. Markets have pretty much given up all hope of a cut this year and now see April as the first likely window for an easing.

“Nothing in the local data flow in recent weeks has thrown up a serious challenge to the market view that the most likely scenario is for an extended stay at the prevailing cash rate,” said Ray Attrill, head of FX strategy at NAB.

“There are non-trivial risks the next the next move could be up if Q2 CPI in late July were to shock, or the first cut, we and many other analysts have pencilled in for November, comes later.”