Australia, NZ dollars flatline, might need RBNZ shock treatment

SYDNEY: The Australian and New Zealand dollars were busy going nowhere on Friday as recent tight ranges showed no sign of ending, leaving kiwi bulls hoping for a rate rise next week and the promise of more to break it loose.

The Aussie eased back to $0.7344, having stalled short of resistance at the week's top of $0.7390. It was a fraction lower on the week having spent the entire period corralled in a half-cent band.

A breach of support at $0.7290 or resistance around $0.7426 is needed to break the deadlock.

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

The kiwi was dead flat on the week at $0.7007, having also been confined to a cramped $0.6969/$0.7060 range. Major support lies at $0.6882 with resistance at $0.7088.

The kiwi's captivity could end next week when the Reserve Bank of New Zealand (RBNZ) is expected to hike rates for the first time since 2014, though so much is already priced in that it might take a major surprise to move the market.

A rise of 25 basis points to 0.5% on Aug. 18 is fully priced in and swaps even imply a one-in-four chance of 50 basis-point increase.

"A 50 point move in one go would be very unusual - especially on the upside - but not unprecedented," noted Michael Gordon, Westpac's NZ economist. "We don't see this as the most likely outcome."

The last time the RBNZ hiked by 50 basis points was in May 2000, though it has cut by as much or more since.

Gordon also believes the RBNZ will hike in October and November, and will project rates of 2% by mid-2023.

"Raising interest rates now would put the RBNZ ahead of its overseas peers by quite some margin," he added. "But that reflects the unique circumstances that the RBNZ faces as eliminating the spread of COVID has allowed the domestic economy to build up a head of steam."

Yields on two-year bonds have already climbed to their highs for this year at 1.02%, offering a plump premium to US bonds of 79 basis-points.

Australian debt, in contrast, trades 18 basis points below two-year Treasuries at a meagre 0.05%. That divergence has seen the Aussie decline steadily on the kiwi to reach NZ$1.0425, near lows last seen in December.

The Reserve Bank of Australia (RBA) still insists it is unlikely to increase the 0.1% cash rate until 2024 given weakness in wage growth and core inflation.

While the market suspects it will move earlier, a rise to 0.25% is not priced in until November next year.