Australia, NZ dollars suffer setback, market locks in RBNZ hike

SYDNEY: The Australian and New Zealand dollars were trying to regain some composure on Wednesday after a bout of global risk aversion boosted their US counterpart, while betting firmed on an RBNZ rate hike next month.

The Aussie was nursing a grudge at $0.7391, after falling 0.7% overnight and away from the recent two-month peak of $0.7477. Immediate support lies at $0.7380 and $0.7350, with a major bulwark around $0.7290.

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The kiwi was back at $0.7099 having lost 0.5% overnight following repeated failures to clear $0.7170 resistance. It has support at $0.7087 and $0.7050.

Analysts were still digesting Tuesday's decision by the Reserve Bank of Australia (RBA) to stick with plans to trim its bond buying to A$4 billion a week, but also extend that out to February as a nod to coronavirus uncertainties.

While the RBA Board conceded that the economic recovery from current Delta lockdowns would likely be drawn out, it also predicted a very strong pick up over all of 2022.

"Our forecast for growth in 2022 is 7.4% and it appears that the Board is now of a like mind under that outlook it is reasonable that the Board would be expecting a possible phasing out of QE as early as May next year," said Westpac chief economist Bill Evans.

Australian bonds were caught up in selling of Treasuries which saw 10-year yields touch a two-month top at 1.307%, a rise of 7 basis points for the week so far.

Yet yields were still 6 basis points below those in the United States with the market encouraged the RBA had committed to keep buying at a steady rate for at least another six months.

In New Zealand, there was positive news from the latest global auction of dairy, which saw prices rise 4% in a boom for farmers. Dairy is the country's biggest export earner and has helped fuel a record-breaking rise in its terms of trade.

That strength, combined with its success in containing a Delta outbreak, has seen markets fully price in a quarter-point rate hike from the Reserve Bank of New Zealand at its October policy meeting, and another 25 basis points in November too.

"The resilience in expectations of an RBNZ hike reflects market confidence that New Zealand's virus strategy will enable a quick reopening," said analysts at ASB. "Indeed, NZ appears on track to eliminate the virus and lift remaining restrictions."