New Zealand dollar buoyed by yield surge, Aussie lags behind

SYDNEY: The New Zealand dollar aimed to extend its rally on Thursday as the market priced in a real chance that local interest rates could rise as soon as August, well ahead of any other developed nation.

In contrast, the Australian dollar was struggling at $0.7456 , having failed to get any lift from another set of surprisingly upbeat jobs figures.

The kiwi stood at $0.7007, after rising 1.3% overnight to be the best performing developed nation currency.

However, it did run into resistance at $0.7044, ahead of the next bull target at the July top of $0.7105. Support comes in around $0.6990 and at $0.6940.

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

The currency took off on Wednesday after the Reserve Bank of New Zealand (RBNZ) wrongfooted the market by ending its bond buying campaign, well before most analysts had expected.

That led some to tip a rate rise as early as next month, with the market now implying a 70% risk of a quarter-point hike to 0.5% at the Aug. 18 policy meeting.

"The hawkish RBNZ signal gives the NZD solid footing with respect to yield spreads, and an opportunity to break above the $0.6925-0.7105 month-old range," said Westpac strategist Imre Speizer, citing a year-end target of $0.7400.

"The NZ economy is expected to remain buoyant over the remainder of this year; the RBNZ has signalled rate hikes; NZ-US yield spreads are rising, and commodity prices have a positive outlook."

Yields on two-year bonds extended their rise to reach 0.76%, a jump of 19 basis points in just two sessions. The spread over Treasuries zoomed out to 54 basis points, from 7 basis points a month ago.

All of which stands in marked contrast to the Reserve Bank of Australia (RBA) which is still insisting a rate hike is unlikely until 2024, despite a remarkable recovery in the country's labour market.

Data out Thursday showed another 29,100 jobs were created in June driving the unemployment rate to a decade low of 4.9% and again beating all the RBA's forecasts.

That performance has been marred, however, by an ongoing coronavirus lockdown in Sydney which has the potential to shrink national gross domestic product this quarter.

"A lockdown of around 7 weeks in Greater Sydney could see a significant number of NSW workers stood down," said Gareth Aird, head of Australian economics at CBA.

"Employment could fall by 200k and add 0.4 percentage points to the national unemployment rate, all else equal."