Aussie and kiwi dollars brace for volatility as rate hike risks loom

what happened

According to Reuters, the Australian and New Zealand dollars barely moved on Tuesday as investors awaited major event risks in both countries that will shape the rate outlook in the coming months. The Aussie traded at $0.7020, while the kiwi sat near $0.5690.

The Reserve Bank of New Zealand is widely expected to raise its official cash rate by a quarter point to 3.0% on Wednesday, as high energy costs feed into core inflation. Markets also price in a roughly 60% chance of another hike in December and a peak near 3.75%, above the central bank's own 3.2% projection. As Kiwibank's Mieneke Perniskie put it, the kiwi could be vulnerable to downside if those tightening expectations are not delivered.

In Australia, third-quarter consumer prices are due Wednesday, with core inflation forecast to rise 1.0% and the annual pace holding at 3.6%, well above the RBA's 2% to 3% target range. Markets put a 66% chance on a rate rise to 4.85% when the RBA meets on November 3, though that is widely seen as the peak of the cycle.

why it matters

What matters for markets is the path of rates from here. Weak labour data, with unemployment rising to 4.7% in September, could limit further RBA tightening and push bond yields lower if the trend continues.

market impact

AUD and NZD: central bank decisions and inflation drive currency volatility and bond yields

tags

instruments