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SYDNEY: The Australian and New Zealand dollars on Monday gave up some recent gains from China easing its zero COVID policy, drifting lower as a top US central banker warned investors against getting carried away over one inflation report.

The Aussie slid 0.4% to $0.6678, having surged 1.3% on Friday as China eased some of its COVID rules and shortened its quarantine period.

The Antipodean was up a whopping 3.6% last week, its biggest gain since mid-2020, with resistance now sitting around $0.6750.

The kiwi also skidded 0.4% to $0.6094, after climbing 1.5% in the previous session to its strongest level since mid-September.

Resistance now lies around $0.6150.

Australia, NZ dollars stall ahead of US inflation test

A modest miss on US inflation on Thursday sent two-year Treasury yields 33 basis points lower for the week and the dollar down almost 4%, its fourth biggest weekly decline since the era of free-floating exchange rates began more than 50 years ago.

On Monday, Federal Reserve Governor Christopher Waller warned that the markets were well ahead of themselves on just one inflation report, adding that it would take a string of soft reports for the bank to take its foot off the brakes.

However, he did concede the Fed could now start thinking about hiking interest rates more slowly.

The US dollar firmed 0.2% against a basket of currencies on the hawkish comments from Waller.

Futures are wagering heavily on a half-point rate rise to 4.25-4.5% in December and then a couple of quarter-point moves to a peak in the 4.75-5.0% range.

George Tharenou, UBS chief economist for Australia, expects the Aussie dollar, which was hammered by the dovish shift by the Reserve Bank of Australia, in contrast with central banks elsewhere, to continue trending upwards to the high 60s or even 70 cents against the US dollar.

“UBS has called the bottom for the Aussie dollar …. I think with a positive risk environment, equities bouncing off their lows and Fed’s pivot, the Aussie dollar’s direction is looking up, with the key concern still being China.”

Tharenou still expects the RBA to raise its cash rate by 25 basis points to 3.1% at its December policy meeting.

Markets were even pricing in a slightly greater risk than before - with a probability now of 43% - that the RBA might hold steady at 2.85% in December.

Yields on Australian three-year bonds jumped 9 basis points to 3.263%, tracking moves in their US counterparts on comments from Waller.

They fell to the lowest since mid-August on Friday.

Yields on ten-year bonds rose by 10 basis points on Monday to 3.753%.

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