Australia, NZ dollars grapple with risk aversion before inflation test



SYDNEY, Jan 24 (Reuters) - The Australian and New Zealand dollars were at the mercy of global risk aversion on Monday as most equity markets extended their decline, while investors awaited a key reading of domestic inflation, which could impact on interest rates.

The Aussie was flat at $0.7180 AUD=D3 and well short of last week's peak of $0.7275. Support lies at $0.7170 while resistance comes in at $0.7277 and $0.7314.

The kiwi dollar lagged badly at $0.6707 NZD=D3 , just a whisker from its December trough of $0.6702. A break would take it to territory not visited since late 2020 and risk a further decline to at least $0.6590.

Markets were tense ahead of a Federal Reserve policy meeting at which it is expected to open the door to a U.S. rate rise as soon as March and to winding back its vast balance sheet, which could drag on risk assets.

Domestically consumer price figures on Tuesday could set the stage for the Reserve Bank of Australia (RBA) to end its bond buying in February and reinforce market wagers for a hike as soon as May or June. RBAWATCH

Median forecasts are for the CPI to rise 3.2% on the year in the December quarter, while core inflation is seen picking up to its fastest since 2014 at 2.4%.

Both National Australia Bank and Commonwealth Bank of Australia predict trimmed mean inflation will hit 2.5%, putting it back in the middle of the RBA's 2%-3% target band two years earlier than predicted by policy makers.

"This would mean the RBA would need to revise up their CPI forecasts and we think the Bank will be able to forecast core inflation being at the mid-point of the 2-3% band across their entire forecast horizon," said Taylor Nugent, an economist at NAB.

"Come the RBA's February meeting, QE is clearly gone, while for the rates view much depends on its willingness to tolerate inflation at or above target as it waits until wages growth is closer to 3% plus."

The bond market has already priced in a lot of tightening risk with three-year yields AU3YT=RR up at 1.14% and near levels last visited in mid-2019.

The Reserve Bank of New Zealand (RBNZ) is well ahead of the game having already hiked twice and fully expected to move again at its meeting on Feb. 23.

However, higher rates have done the kiwi no favours, with the currency two cents lower than when the RBNZ first pulled the trigger in October.
Editing by Sam Holmes

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.