The Australian dollar was holding steady on Thursday having rebounded from two-week lows, proving more resilient than its New Zealand counterpart in a week that saw soft local inflation figures tame kiwi bulls. The Aussie was at $0.9361 after bouncing overnight from a two-week low of $0.9329. That kept the currency well within the $0.9320/0.9505 range seen in the past two months.
The kiwi dollar traded at $0.8690, after touching a three-week low of $0.8685. It is down 1.4 percent so far this week, compared with a 0.3 percent decline for the Aussie. A soft reading of domestic inflation and a tumble in global dairy prices have raised concerns that New Zealand's strong economic growth cycle may be maturing.
The trade-weighted kiwi posted its biggest daily decline in six months on Wednesday as many investors pared pack expectations that interest rates will increase much more beyond a widely expected lift to 3.5 percent next week. The trade-weighted kiwi fell to a trough of 80.93, pulling back from a post-float high hit last week. The currency has also retreated from a near three-year high against the US dollar.
But some analysts pointed out that selling momentum petered out in offshore trade, suggesting that yield-hungry investors weren't ready to start dumping the currency just yet. "With the RBNZ review next week, and the market expecting rates will still increase at the review, it tells you that the market still places an important part of their weighting of NZD strength on yield," ANZ currency strategist Sam Tuck said.
He added that investors were cautious about taking the kiwi much lower ahead of the RBNZ's rate review given the risk that the central bank may continue to strike a hawkish tone on rates despite a recent string of softer data. Markets are pricing in an 84 percent chance of a 25-basis-point rate increase next week, down from around 90 percent before Wednesday's data, but still strongly tilted towards tightening.
The kiwi struggled against most major currencies, and particularly against the Aussie, which traded at NZ$1.0760. Market participants said they were seeing a gradual bias emerging to sell the kiwi versus the Aussie. New Zealand government bonds were a touch softer, lifting most yields a basis point higher along the curve. Benchmark 10-year yields touched a five-week low of 4.4 percent on Wednesday. Australian government bond futures were firmer on the day and either at or near multi-month highs. The three-year contract added 1 tick to 97.470, near an 11-month top of 94.490 set on Wednesday. The 10-year contract rose 3 ticks to a fresh 13-month peak of 96.610.
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