Australia, NZ dollars swept up in relief rally, RBNZ talks of tightening

SYDNEY: The Australian and New Zealand dollars were swept higher on Wednesday as a tentative ceasefire in the Gulf triggered a relief rally across risk assets, while the diminished risk of runaway inflation boosted bonds.

That should be welcome news to the Reserve Bank of New Zealand which decided to hold the official cash rate (OCR) at 2.25% on Wednesday, but warned hikes might be needed to head off any increase in inflation expectations.

Minutes of the meeting showed some members favoured “a pre-emptive response” to inflation pressures, while others were more concerned about risks to economic growth.

In the end, the committee agreed “decisive and timely increases in the OCR would be required” if inflation expectations and wages started to pick up.

“This statement would appear to give the RBNZ greater optionality to hike rates if core inflation surprises to the upside, even if medium-term inflation expectations remain anchored,” said Andrew Boak, an economist at Goldman Sachs.

The hawkish tone gave the kiwi a further fillip, leaving it up 1.5% at $0.5823 and well above a recent low of $0.5681.

The next layer of resistance is up at $0.5891.

The Aussie climbed 1.1% to $0.7053, a marked turnaround from its recent trough of $0.6834. Resistance now lies at $0.7124 and $0.71875.

The RBNZ’s steady decision was widely expected, but the talk of early tightening saw bonds pare their early gains.

Yields on 10-year notes were still down 7 basis points at 4.673%, but off a low of 4.643%. Markets imply around a 33% chance of a hike to 2.50% at the RBNZ’s next meeting in May, and a 70% chance for July.

A move is fully priced for September and rates are seen rising to at least 2.75% by the end of the year.

The Reserve Bank of Australia has already hiked rates by a total 50 basis points to 4.10% as inflation has been stubbornly stuck well above its target range of 2% to 3%.

Markets imply a 55% chance of another quarter-point rise in May, though that was down from near 70% last week, and see rates at 4.61% by year-end.

Bonds joined the global rally on Wednesday, with 10-year yields falling 11 basis points to 4.892% and three-year futures up 9 ticks at 95.405.