Australia, NZ dollars becalmed, bond yields hit 4-month lows

SYDNEY: The Australian and New Zealand dollars struggled for direction on Wednesday, as world markets awaited an update on US inflation, while an Australian central banker showed no hint of backing away from its stimulus stance.

The Aussie was parked at $0.7742, having spent the past two sessions locked in a range of $0.7727 to $0.7765. Resistance is layered at $0.7774, $0.7796 and $0.7813, while support comes in around $0.7715/26.

Westpac analysts were surprised the Aussie had been so becalmed even as global commodity prices kept climbing.

"The degree of stretch between the A$ and the midpoint of our fair value models is close to the largest in weekly data back to 2008," they said in a note.

"Thus, we remain happy to stay long from below $0.7680 and to passively buy further dips down to $0.76."

The kiwi dollar steadied at $0.7197, having slipped 0.5% overnight. It remains well within the $0.7116 to $0.7316 band that has lasted for the past two months.

There was more movement in bonds as a rally in Treasuries and the dovish comments from the Reserve Bank of Australia (RBA) helped nudge 10-year yields to their lowest since February at 1.525%.

That left the market vulnerable should the US consumer report on Thursday surprise on the high side, though investors seem to be wagering the Federal Reserve will still consider the rise transitory when it comes to policy tapering.

RBA Assistant Governor Chris Kent on Wednesday downplayed the risks of inflation domestically and globally noting inflation expectations had only returned to where they were a few years ago.

Kent reiterated that the bank did not expect domestic inflation to return to its 2-3% target band until 2024 at the earliest, so policy would need to stay very accommodative.

The need for caution was underlined by the coronavirus lockdown in Victoria state that triggered a sharp 5.2% drop in the Westpac-MI consumer confidence index.

Victorian authorities have flagged an easing of restrictions from Friday, but the sluggish pace of the country's vaccine rollout leaves it exposed to further outbreaks.