Australia, NZ dollars regain altitude as domestic economies run strong

SYDNEY: The Australian and New Zealand dollars regained some altitude on Wednesday as surprising strength in local economic data suggested the United States was not the only country where upward pressure on interest rates was mounting.

The Aussie edged up to $0.7734, after touching a three-week low of $0.7675 overnight when the US dollar got a broad lift from talk of future US rate hikes.

The kiwi dollar firmed to $0.7173 and away from a trough of $0.7116, which now marks major chart support.

It was helped by data showing New Zealand's unemployment rate unexpectedly dipped to 4.7% in the March quarter, when analysts had thought it would stay at 4.9%.

"Today's report was a great read, and confirms the strength of the Kiwi economy," said Jarrod Kerr, chief economist at Kiwibank. "The economic scarring from Covid lockdowns is far less than anyone had predicted six months ago."

Kerr doubted this alone would shift the Reserve Bank of New Zealand (RBNZ) from its dovish policy outlook, but the economy was clearly performing better than it had forecast.

"The tighter the labour market, the more pressure on wage growth. And wage inflation is not as easily dismissed by the Reserve Bank as inflation generated by temporary supply disruptions," he added.

Investors responded by lifting 10-year bonds yields to 1.74%, the highest since mid-April.

In Australia, the surprise came in approvals to build new homes which blew away forecasts with a rise of 17.4% in March, confirming a major boom was underway.

Approvals to build new houses were up a staggering 61% on a year earlier at a record peak, while the value of commercial building also hit an all-time top.

Building booms tend to have major spillovers to jobs and spending and should make the Reserve Bank of Australia (RBA) even more confident on the economy after it upgraded its forecasts on Tuesday.

"The RBA managed to surprise us, upgrading all key forecasts more than we anticipated," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities.

He now doubted the RBA would roll over its target bond for yield curve control from the current April 2024 line to the November 2024 issue.

Yet it would likely announce a third tranche of A$100 billion in bond buying in July, if only because the Fed was not expected to flag any tapering in its purchases by then.