The Australian dollar jumped on its New Zealand rival on Thursday as investors ramped up bets for a kiwi rate cut as soon as next week, while pushing out the timing for an easing at home.
New Zealand rate markets rallied sharply after the Reserve Bank of New Zealand (RBNZ) reported its survey of inflation expectations had seen the two-year outlook sink to 2.03% for the September quarter, from 2.33% previously.
That is right back in the middle of the RBNZ's 1-3% target band and well below the current inflation rate of 3.3%.
"This measure has not typically fallen to these sorts of lows except at times when actual inflation has fallen below 2%," noted Satish Ranchhod, a senior economist at Westpac.
"This reinforces our expectation the RBNZ will signal earlier rate cuts than previously assumed at their policy meeting next week – we're forecasting cuts will begin in October."
Investors are gunning for a move right now and swaps swung to imply an 81% chance the RBNZ would cut its 5.5% cash rate by a quarter point at its Aug. 14 meeting.
0#RBNZWATCH Swaps had implied just a 48% chance early in the week. The market is now pricing in 90 basis points of easing by November.
In contrast, the head of the Reserve Bank of Australia (RBA) on Thursday flagged there was little chance of them cutting at all this year, based on their current forecasts.
Markets now imply a 48% chance of a rate cut by November, compared to 88% early in the week, and a slower pace of easing next year.
0#RBAWATCH This was enough for Westpac to revise its call for the first cut out to February, from November. Analysts at ANZ are also tipping February for the first move, while NAB sees them holding on until May next year.
The diverging view on policy helped the Aussie gain 0.5% on the kiwi to NZ$1.0923 AUDNZD= . It rose 0.6% on the U.S. dollar to $0.6558 AUD=D3 , aided in part by an improvement in risk sentiment across global equity markets.
The kiwi trailed at $0.6002 NZD=D3 , but was still well up from the $0.5849 low hit when markets took a tumble on Monday.
