The New Zealand dollar got a rare rally on Monday after an alarmingly high reading on inflation stoked speculation of more aggressive rate hikes, pushing up bond yields and its Australian cousin.
The kiwi popped up to $0.6180 and away from last week’s two-year low at $0.6061. It now faces resistance around $0.6204 and $0.6253, reports Reuters.
The Aussie extended a bounce to $0.6810, putting a little distance between its two-year trough of $0.6682. Resistance lies around $0.6825 and $0.6873.
Data showed New Zealand consumer prices jumped 1.7 per cent in the second quarter lifting annual inflation to a 32-year high of 7.3 per cent, topping forecasts of 7.1 per cent.
Two-year swap rates climbed 8 basis points to 4.12 per cent in a reaction as investors priced in more risk the Reserve Bank of New Zealand (RBNZ) might hike by a larger 75 basis points next month.
“Today’s upside surprise clearly raises the risk that the RBNZ steps up the pace of tightening at its August meeting - we see a 35 per cent chance of a 75bp hike,” said Goldman Sachs economist Andrew Boak.
“However, with rates already at a modestly restrictive level of 2.5 per cent, we think the bar for the RBNZ to accelerate the pace of tightening at this point in the cycle is relatively high - and will likely require clearer signs of a breakout in long-term inflation expectations rather than high spot inflation.”
The red-hot CPI report also suggested there was some risk Australia’s inflation figures due next week might surprise on the high side.
Analysts already fear annual inflation accelerate beyond 6 per cent in the second quarter and could be near 8 per cent by the end of the year.
A super-strong jobs report last week has fuelled wagers the Reserve Bank of Australia (RBA) might step up its hiking pace by 75 basis points in August.
“Inflationary pressures are building, confirming the RBA will need to lift the cash rate by at least 50bp at its meeting in August, and raising the risks of a larger rise or more front-loaded hiking,” said Felicity Emmett, a senior economist at ANZ.
“The ongoing strength and the broad-based nature of that strongly suggest the RBA will be eager to get the cash rate back to neutral quickly.”
RBA Governor Philip Lowe has indicated he sees neutral rates as being around 2.5 per cent, a long way from the current 1.35 per cent. Lowe is scheduled to give a speech on Wednesday and his deputy on Tuesday, and they are likely to draw questions on the speed of tightening.