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The Australian dollar was squeezed higher on Wednesday after one measure of inflation came slightly above forecasts, even as restrained price pressures overall suggested there was room for further cuts in interest rates. The New Zealand dollar consolidated recent gains as investors awaited the outcomes of US and New Zealand central bank decisions this week.
The Australian dollar rose to $0.7030, from just below 70 cents, pulling further away from a seven-year trough of $0.6828 touched last week. Resistance was found around $0.7050, a level that has proved difficult to breach in recent weeks. A break would target $0.7080.
While Australian core inflation slowed to the floor of the central bank's target range, speculators had been positioned for a weaker number. "The main focus for the market was the trimmed mean CPI which came above expectations," said Sean Callow, a senior currency strategist at Westpac. The New Zealand dollar was steady at $0.6490, having bounced from a low of $0.6435 hit overnight. It was briefly troubled by news Fitch had lowered its outlook on New Zealand's credit rating to stable from positive. The Reserve Bank of New Zealand holds a policy meeting on Thursday and is widely expected to keep rates at 2.5 percent. Yet pressure for a cut is building as the economy teeters on the verge of deflation.
New Zealand government bonds gained, sending yields 2.5 basis points lower at the long end of the curve. Australian government bond futures were mixed, with the three-year bond contract down 4 ticks at 98.060. The 10-year contract was half a tick higher at 97.3100, while the 20-year contract was 2 ticks firmer at 96.8300.

Copyright Reuters, 2016

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