Australia, NZ dollars edge higher, odds narrow on RBNZ hike

SYDNEY: The Australian and New Zealand dollars were a little firmer on Thursday after a slight cooling in US inflation restrained the greenback, while a high reading for domestic inflation expectations underpinned the kiwi.

The Aussie dollar stood at $0.7363, after bouncing from a low of $0.7316 early in the week, which now acts as chart support. Resistance lies at $0.7390 and $0.7415 and a break above $0.7427 is needed to improve the technical background.

Australia, NZ dollars near recent lows as risk appetite wanes, bonds gain

The kiwi dollar held at $0.7038 having risen 0.5% overnight and away from the week's trough of $0.6969. It faces resistance at $0.7060 and $0.7088.

A closely-watched survey of inflation expectations from the Reserve Bank of New Zealand (RBNZ) showed a sharp rise on a one-year horizon to 3.02%, from 1.87%. That was the highest reading since 2010, but mainly reflected an already reported jump in consumer prices.

Inflation expectations for two years out firmed to 2.27%, from 2.05%, the highest since 2014 and another reason the RBNZ might decide to raise its 0.25% cash rate (OCR) at a policy meeting next week. The central banks aims to keep inflation in a 1-3% band with a central target of 2%.

However, longer term expectations for five and 10 years did remain anchored at 2.0%, suggesting less need for an aggressive half point hike in rates.

Markets are fully priced for a rise to 0.5%, and imply around a 27% chance of a larger move to 0.75%.

A surprisingly strong economic recovery, rapidly falling unemployment and a red-hot housing market have all combined to set the stage for an unwinding of stimulus by the RBNZ.

Home prices were up 25% on a year ago in July at a record peak after months of torrid growth.

"The heat from the housing market is getting a little too hot to handle," said Jeremy Couchman, a senior economist at Kiwibank.

"High-risk debt continues to build so financial stability concerns have pushed the RBNZ to act," he added. "The RBNZ is set to deliver the first in a series of rate hikes next week and macro-prudential policy is being tightened further."

In Australia, the economy has been undermined by the spread of the Delta variant, which triggered a lockdown in the capital of Canberra on Thursday, the first in more than a year.

The spread of lockdowns has made policy tightening in Australia a distant prospect and pulled 10-year bond yields down to 15 basis points below US yields at 1.20%.