(Updates odds for May hike, RBA rate pricing)
The New Zealand dollar held firm on Wednesday after the country's central bank raised interest rates by an aggressive 50 basis points, though it tempered that a little by not lifting its projected peak for rates.
While a majority of economists had looked for a rise of just a quarter percentage point from the Reserve Bank of New Zealand (RBNZ), the market had wagered heavily on a half point. That limited the reaction.
The kiwi edged up 0.1% to $0.6855 NZD=D3 and remained well short of its recent five-month high of $0.7034. Support comes in at $0.6808, with resistance at $0.6906.
This was the fourth hike by the RBNZ in the current cycle and took the cash rate to 1.5%, with the central bank arguing that faster moves now would lessen the risk of inflation getting out of hand in the future.
That saw investors price in a chance of around 75% for another half-point hike for the May policy meeting and a rate of at least 3.0% by year-end. RBNZWATCH
"Given that we expect wage growth and inflation to rise further in the months ahead and the labour market to remain tight, the RBNZ still has a lot of work ahead of itself," said Ben Udy, an economist at Capital Economics.
"We have pencilled in 6 more rate hikes this year, which would mark one hike at every meeting along with another 50 basis points in May," he added. "That would take rates to 3.0% by the end of this year."
However, the RBNZ was also content to keep its previously projected peak for rates at 3.35% - not lifting it to 3.5% or higher, as some hawks in the market had bet on.
As a result, two-year swap rates NZDSM3NB2Y= actually eased 17 basis points to 3.46% as the market trimmed back some of its future tightening expectations. RBNZWATCH
Yields on 10-year bonds NZ10YT=RR also came off 9 basis points to 3.48%.
The Australian dollar edged up to $0.7467 AUD=D3 on speculation the sharp move by the RBNZ would increase pressure for an early increase in the Reserve Bank of Australia's 0.1% cash rate.
Futures are fully priced for an Australian hike to 0.25% in June, and imply around a one-in-four chance of an increase to 0.5%.
Again, markets assume a series of rapid-fire moves taking rates to 2.0% by the end of the year. RBAWATCH
