The Australian and New Zealand dollars were on the defensive on Tuesday as risk aversion dominated ahead of a raft of global inflation data, and a local policy meeting that might just see a fresh hike in interest rates.
Markets are pricing in a one-in-three chance the Reserve Bank of New Zealand (RBNZ) will raise its 5.5% official cash rate (OCR) on Wednesday to combat stubborn inflation.
A Reuters poll found only one of 28 analysts expected a hike, though TD Securities has since changed its call to a tightening. If the central bank does hold steady, it is likely to sound hawkish and keep the prospect of at least one rise in its rate projections.
Indeed, swaps imply around a 60% chance of one hike by May, and have only a single quarter-point cut priced in for late in the year.
0#RBNZWATCH "A hike will likely generate an asymmetric reaction in rate markets, up by roughly double that of an on hold," said Matthew Crowder, balance sheet manager of Treasury at Kiwibank.
"An on hold RBNZ decision will see some of the priced hike unwind, expect a -10 to -15bp fall in rates, and that's regardless of the OCR track which is expected to remain at 5.70% as a minimum."
Kiwibank believes the RBNZ has no need to tighten further, yet does not see a cut as likely until November at the earliest.
The key two-year swap rate NZDSM3NB2Y= is currently at 5.215%, having climbed from as low as 4.70% in the past three weeks as investors adjusted to the risk of a hike.
The kiwi dollar stood at $0.6167 NZD=D3 , after slipping 0.4% on Monday and away from a recent six-week top of $0.6218.
The Aussie had likewise backtracked to $0.6540 AUD=D3 , from a peak of $0.6595 last week, but has support around $0.6520.
Figures on monthly Australian consumer prices are due on Wednesday and are forecast to show annual inflation edged up to 3.5% in January, following a big drop to 3.4% the month before.
The January release is heavily weighed toward goods prices which have been falling faster than services, and thus suggest some scope for a downside surprise.
Travel costs are a major unknown with airline fares having a habit of swinging wildly from month to month.
Inflation figures are also due this week from the United States and European Union that will help refine the outlook for future rate cuts there.
