Dollar gains vs Aussie after weak CPI, Lowe speech

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The New Zealand dollar gained against the Aussie after Australian second-quarter inflation was more muted than expected and Reserve Bank governor Philip Lowe talked down the possibility of imminent rate hikes.

The kiwi rose to 93.95 Australian cents as at 5pm in Wellington from 93.69 cents yesterday. The New Zealand dollar fell to 74.24 US cents versus 74.38 late yesterday.

Australian consumer prices rose by 0.2 per cent versus the first quarter and were up 1.9 per cent from a year earlier, the Australian Bureau of Statistics said Wednesday. Economists had expected consumer prices to rise by 0.4 per cent in the quarter and by 2.2 per cent from a year earlier. Measures of core inflation remained well below the central bank's desired 2 per cent to 3 per cent band, which is likely to keep the Australian bank on hold for some time. Core inflation rose by 0.5 per cent in the quarter and was up 1.8 per cent on the year.

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The data was followed by a speech by RBA Governor Lowe that "put extra pressure on the Aussie dollar," said Martin Rudings, senior dealer foreign exchange at OMF in Wellington.

In a speech published on the RBA web site, Lowe said that elsewhere in the world, some central banks are now starting to increase interest rates and others are considering when to withdraw some of the monetary stimulus that has been put in place. However, "this has no automatic implications for monetary policy in Australia.... Just as we did not move in lockstep with other central banks when the monetary stimulus was being delivered, we don't need to move in lockstep as some of this stimulus is removed," he said.

Rudings said, however, the main event for markets will be the statement from the US Federal Reserve, after it wraps up its two-day meeting, which will be early Thursday morning New Zealand time.

"I think ultimately the market is still a little bit nervous about the statement from (Federal Reseve Chair Janet) Yellen tomorrow morning and I think ultimately that's going to be the big mover," said Rudings. "We are expecting Fed Yellen to stay on course with her monetary policy and the guidance that there will be another rate hike this year in the US and they are definitely considering tapering the balance sheet. If that's the case, we will get more US dollar strength in the short term and that should push the kiwi and the Aussie dollar down."

He said, however, given the pressure on the Aussie it may fall further and the NZD/AUD could "probe a bit higher" to around 94.50, "which we think is an excellent opportunity to sell it."

The kiwi traded at 63.74 euro cents from 63.77 cents late yesterday and at 83.03 yen from 82.55 yen. It was at 57.01 British pence from 57.09 pence and at 5.0124 yuan from 5.0192 yuan. The trade-weighted index was at 78.53 from 78.51.

New Zealand's two-year swap rate fell 1 basis point to 2.21 per cent while the 10-year swaps rose 4 basis points to 3.32 per cent.