New Zealand dollar buoyant as rate hike seen just days away

SYDNEY: The New Zealand dollar was looking to end the week with hefty gains on Friday as investors wager a hike in local interest rates is now just days away, while Australian policy makers are still flagging no move until 2024.

The kiwi dollar stood at $0.7048, having gained 1% for the week so far. The next targets are a one-month top of $0.7088 hit earlier in the week and the July peak of $0.7105.

The Aussie lagged at $0.7387, to be up 0.5% for the week. That was off its high of $0.7426, and a break there is needed to clear the way for a return to $0.7500 and maybe an end to its recent bout of weakness.

Australia, NZ dollars near recent lows as risk appetite wanes, bonds gain

The kiwi has been on a roll since super-strong jobs data all but cemented expectations for a rate hike by the Reserve Bank of New Zealand on Aug. 18, which would be its first since mid-2014.

The cash rate is currently at a record low of 0.25%, following an emergency cut of 75 basis points early last year.

It would also be the first increase by any developed country since the pandemic hit and reflects the strength of the local economy and labour market, where unemployment has dived to 4% two years earlier than the central bank had forecasted.

The country's success in eliminating the coronavirus also sets it apart, though low levels of vaccination do leave it vulnerable to an outbreak.

"The RBNZ's assessment of conditions could change if Delta risks manifest as a drop in export demand, or if there is a related softening in local confidence and activity," said Westpac senior economist Satish Ranchhod.

"However, given the strength of economic activity and related lift in inflation pressures, we continue to expect that the RBNZ will hike the cash rate by 25bps at its August meeting, with follow up hikes in October and November."

Markets have already priced in much of that, with two-year swap rates up 16 basis points on the week at 1.1975%.

In contrast, the Reserve Bank of Australia (RBA) keeps insisting its rates will not rise until 2024 given a much softer long-term outlook for inflation and wages.

Coronavirus lockdowns across the country have also clouded the near-term picture, though the RBA is counting on the economy rebounding quickly once restrictions ease.

As a result, Australian 10-year bond yields are near their lowest since February at 1.18%, five basis points below comparable US yields.