economy

Australia, NZ dollar vulnerable to volatility as inflation test looms

SYDNEY: The Australian and New Zealand dollars were pinned near multi-month lows on Tuesday as investors counted down to key local inflation data and a trio of central bank meetings abroad that are certain to generate market waves.

The Aussie dipped to US$0.6535, just above last week's three-month trough of US$0.65105. Support lies around US$0.6455, with resistance at US$0.6595.

The kiwi dollar looked vulnerable at US$0.5870, after coming within a whisker of its April low of US$0.5853 overnight. A break there, would target a trough from October 2023 at US$0.5774.

Markets are braced for a crucial report on Australian inflation due Wednesday that could make or break the case for another hike in interest rates from the Reserve Bank of Australia (RBA).

Forecasts are for a 1.0 per cent rise in both headline consumer prices and core inflation in the second quarter, which would see annual CPI nudge up to 3.8 per cent and leave core inflation at 4.0 per cent.

That would be uncomfortably far above the RBA's target band of 2-3 per cent and could make for a close decision at the central bank's next policy meeting on Aug. 6.

Harry Ottley, an economist at CBA, is looking for core inflation to rise 0.9 per cent in the quarter and 3.9 per cent for the year.

"In our view this would give the RBA enough breathing room to leave rates on hold," he argued.

"We see a print of 1.0 per cent qtr to be in the "grey zone" where they could hold or could hike depending on the component details," he added. "A print of 1.1 per cent qtr or above would test the Board's resolve and shift the balance of probabilities to an increase."

The market implies only a 22 per cent chance of a quarter-point rate hike next week, but also sees little chance of a cut until next April at the earliest.

That outlook contrasts with the Federal Reserve which is expected to lay the groundwork for a September easing at its policy meeting on Wednesday. The Bank of England meets Thursday and futures suggest a rate cut will be a 50-50 call.

Going the other way, the Bank of Japan might well tighten policy on Wednesday in part to help arrest a decline in the yen.

The Reserve Bank of New Zealand meets on Aug. 14 and swaps suggest a 40 per cent chance it will cut rates given recent softness in inflation and labour data. A first easing is fully priced in for October and is one reason the kiwi has been struggling.

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