The New Zealand dollar rallied on Tuesday after a closely watched survey of inflation expectations showed an unexpected rise, tempering speculation about a near-term cut in interest rates there. The bounce helped the Australian dollar recoup losses suffered after the Reserve Bank of Australia (RBA) signalled it was open for further interest cuts if needed.
The kiwi dollar hopped up to $0.7418, from a one-week low of $0.7370, steered by a Reserve Bank of New Zealand survey showing inflation expectations had risen in the June quarter after a long run of declines.
The central bank recently stated it might be open to cutting rates if inflation expectations continued to fall further. With expectations now seemingly steadying, markets quickly lengthened the odds on an easing in the next few months.
"While rate cuts within the year ahead remain a possibility, we believe market pricing near-term is too aggressive," said BNZ senior strategist Kimberly Martin in a note.
The Australian dollar was back up at $0.7988, after briefly slipping to $0.7969 when minutes of the May policy meeting showed the RBA Board believed it still had scope for action following a rate cut to a record low of 2.0 percent.
"The minutes showed the RBA still left open the possibility of cutting," said Joseph Capurso, a strategist at Commonwealth Bank of Australia. While he forecasts a stable rate outlook, he said the balance of risks was for more easing.
New Zealand government bonds were weaker in line with US Treasuries, sending yields up to 7 basis points higher.
Likewise, Australian government bond futures eased, with the three-year bond contract off 7 ticks at 97.860. The 10-year contract lost 10 ticks to 97.0300, leading to a bearish steepening of the curve.