Australia, NZ dollars enjoy respite in risk-on rally, bonds sell-off on hot inflation

SYDNEY: The Australian and New Zealand dollars held onto most of its overnight gains on Wednesday as soft US data fanned hopes that the Federal Reserve will soon slow its rate hikes, while hotter-than-expected Australian inflation hurt short-term bonds.

The Aussie was little changed at $0.6393, after jumping 1.3% overnight to as high as $0.6412 - the strongest level in more than two weeks.

Resistance is now pegged around $0.6410.

The New Zealand dollar slipped 0.2% to $0.5746, having also jumped 1.1% overnight to as high as $0.5779.

While a broadly firmer US dollar has also dented the kiwi recently, it has managed to stay relatively well bid thanks to an aggressive tightening campaign by the Reserve Bank of New Zealand.

Resistance is seen around $0.5790.

US economic data on Tuesday showed slowing home price growth and souring consumer confidence, suggesting the Federal Reserve’s aggressive interest rate hikes might be starting to cool the labour market, sending riskier assets higher.

The Aussie briefly edged up after inflation data surprised on the upside, with the headline consumer price index (CPI) jumping 7.3% in the third quarter, beating the 7.0% market forecast.

“The AUD reaction has been more subdued to date, but we regard this data as AUD supportive,” said Andrew Ticehurst, a rate strategist at Nomura.

The inflation readings are particularly ill-timed for the Reserve Bank of Australia since it surprised many this month by downshifting to a quarter-point rate hike, following four moves of 50 basis points.

Three-year government bond futures slipped 17 ticks immediately after the CPI release, but have since recovered some ground.

Analysts at both ANZ and CBA now expect an additional hike of 25 basis points in December, from previous expectations of a pause in the RBA’s tightening streak.

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“A 50bp rise in November is possible, but we think the RBA will prefer to hike more frequently than shift back to 50bp,” said analysts at ANZ.

Futures still imply a quarter point move on Nov. 1 to 2.85%, but now have added 10 more basis points to the peak in cash rates to around 4.20% in July.