The Australian and New Zealand dollars were looking a little steadier on Wednesday as a second session of Wall Street gains soothed risk sentiment, while the kiwi also benefited from wagers on ever-higher domestic interest rates.
The Aussie edged up to $0.6320 AUD=D3 and further away from its recent 2-1/2 year trough of $0.6170. A break of resistance around $0.6350 could force more short covering.
The kiwi dollar was up at $0.5697 NZD=D3 , having rallied 0.9% overnight to reach as far as $0.5719. It really needs to clear resistance at $0.5810 to keep the turnaround alive.
It was helped by demand against the Aussie, which slid 0.6% overnight to a two-month low of NZ$1.1069 AUDNZD= as the outlook for local interest rates diverged.
Markets have sharply revised up the expected tightening path for the Reserve Bank of New Zealand (RBNZ) following Tuesday's shockingly high reading on domestic inflation.
Two-year swap rates NZDSM3NB2Y= are now up 27 basis points for the week so far at a 14-year high of 5.19% as investors pushed up the likely peak for cash rates (OCR) by more than a quarter-point to 5.33%.
0#RBNZWATCH Analysts at Westpac now see rates topping out at 5%, rather than 4.5%, and tip a hike of 75 basis points at the RBNZ's next meeting in late November.
And they were not alone. "We now expect the RBNZ to lift the OCR by 75bp at the November meeting, previously 50bp, and 50bp in February 2023, previously 25bp, taking the OCR to 4.75%," said Andrew Boak, an economist at Goldman Sachs.
"Risks are skewed towards more increases in 1H2023." Jerome Kerr, chief economist at Kiwibank, lifted his peak for rates all the way to 5%, from 4% previously, so alarming was the news on consumer price inflation.
"The CPI report was a shocker, to put it politely," said Kerr. "The report will be like a red rag to an inflation fighting bull and stronger for longer inflation will force interest rates higher for longer."
In contrast, the market still assumes the Reserve Bank of Australia (RBA) will hike by only 25 basis points at its meeting next month and for rates to peak somewhere around 4.0%.
0#RBAWATCH However, there is a risk the red-hot reading in NZ inflation is echoed by Australia's third-quarter CPI report next week, which could narrow the odds on a half-point hike in November.
