New Zealand dollar climbs as market scents risk of early rate hike

SYDNEY: The New Zealand dollar popped higher on Tuesday as a strikingly strong survey of business conditions and price pressures led investors to wager a hike in interest rates could come as early as November this year, sending bonds reeling.

The marked shift in pricing came just before the Reserve Bank of Australia (RBA) is expected to tinker with its massive stimulus programme, though markets still see little chance of a rate rise until late 2022.

The kiwi dollar climbed 0.7% to $0.7076 after the closely-watched New Zealand Institute of Economic Research (NZIER) survey of business showed a marked pick up in activity.

Firms reported surprisingly strong demand in the June quarter, while labour shortages and supply chain disruptions pointed to rising inflation.

That fuelled speculation the Reserve Bank of New Zealand (RBNZ) would lift the 0.25% cash rate well before its current projection for the third quarter of next year.

"The inflation and demand gauges in the NZIER's Survey are so strong that it is increasingly clear that the RBNZ cannot afford to wait much longer," ASB chief economist Nick Tuffley said in a research note.

"We now expect the RBNZ to start lifting the OCR from November 2021."

The market reacted swiftly by ramping up the chance of a 25 basis point hike in the next six months. Yields on two-year bonds jumped almost 10 basis points to its high for this year at 0.64%.

The Aussie dollar was dragged 0.3% firmer to $0.7556 as investors wondered if the RBA would sound more hawkish given concerns about inflation globally.

Analysts assume the central bank will not shift its three-year bond target to November 2024, from the current April 2024 line, but will announce another round of bond buying in some form or other.

The market is already priced for no extension in the yield curve target with the September three-year bond future trading at 99.535, compared with the June contract's close of 99.846.

Investors have also priced in a risk of a rate hike by late 2022, while the RBA has been saying a move was unlikely before 2024.

If the central bank were to drop 2024 from its statement, that would be taken as a green light for an earlier move.