Australia, NZ dlrs in demand as rate outlooks diverge

The Australian and New Zealand dollars were in demand on Thursday, helping the latter climb to three-month highs as the prospect of steady interest rates at home contrasted bullishly with the start of easing cycles abroad.

The Bank of Canada on Wednesday became the first of the G7 central banks to ease, and open the door to more reductions, while the European Central Bank is thought certain to lower its rates later in the session.

The Reserve Bank of New Zealand (RBNZ) is seen keeping its rates at 5.5% until at least November, while an easing from the Reserve Bank of Australia (RBA) is seen as unlikely until April next year.

The diverging outlook versus other countries helped lift the Aussie up 0.5% to $0.6678, after finding support at $0.6626 overnight. Resistance lies at $0.6699 and the May top of $0.6714.

The kiwi dollar reached $0.6209, and looked set to test a major double top at $0.6217/18.

It was aided by a retreat in the Japanese yen which has seen wild swings this week as crowded carry trades were briefly squeezed. Having dived 1% on Tuesday, the kiwi recouped all those losses on Wednesday and was now near 17-year highs at 96.57 yen.

A weak report on the Australian economy for the first quarter led markets to erase almost any chance of another rate hike, but a cut in the 4.35% cash rate is still seen distant.

The head of the RBA on Wednesday reiterated the outlook for rates was balanced, but also emphasised it was ready to tighten again if inflation proved more stubborn than expected.

That highlighted the importance of the main consumer price report for the second quarter due out at the end of July, where an upside surprise would revive the risk of a rate hike at the RBA board meeting on Aug. 6.

"Our forecast for core inflation is 0.8-0.9%," said Gareth Aird, head of Australian economics at CBA. "We believe such an outcome would be sufficient for the RBA to leave the cash rate on hold, but a core print stronger than forecast would test the RBA's resolve to not tighten policy further."

"We anticipate the RBA can commence an easing cycle by November, but given the challenging inflation backdrop the risk to our call is increasingly moving towards a later start date."