AUD/USD and NZD/USD Fundamental Daily Forecast – Aussie Firms as CPI Rise Fans Flames of Early Rate Hike

The Australian and New Zealand Dollars are trading mixed on Wednesday after the release of key domestic economic reports. The Aussie dollar rose and short-dated Aussie government bonds sold heavily after the release of a report that showed Australian core inflation hit a six-year high. The Kiwi dollar retreated after New Zealand reported a record trade deficit.

At 06:40 GMT, the AUD/USD is trading .7528, up 0.0026 or +0.35% and the NZD/USD is at .7170, up 0.0007 or +0.10%.

Australia Core Inflation Hits 6-Year High in Q3, Fuels Rate Hike Fever

Australian core inflation sped to its fastest annual pace since 2015 in the September quarter as price increases became more broad-based, a major surprise that led markets to wager heavily on earlier hikes in interest rates, Reuters reported.

Data from the Australian Bureau of Statistics out on Wednesday showed the headline consumer price index (CPI) rose 0.8% in the third quarter and 3.0% for the year, much as expected.

However, the trimmed mean measure of core inflation favored by the Reserve Bank of Australia (RBA) rose 0.7% in the quarter, above forecasts of 0.5%.

The annual pace accelerated to 2.1%, well above the 1.8% expected and putting it back in the RBA’s 2% to 3% target range for the first time in six years.

The central bank had forecast core inflation would not reach 2% until mid-2023 and, in turn, that cash rates would remain at record lows of 0.1% right out to 2024.

NZ Reports Record Trade Deficit in September; Business Confidence Falls in October

New Zealand posted a record merchandise trade deficit of NZ$2.171 billion in September, Statistics New Zealand said on Wednesday. That follows the upwardly revised NZ$2.139 billion deficit in August.

Exports climbed NZ$387 million or 10 percent on year to NZ$4.40 billion following the upwardly revised NZ$4.36 billion total in the previous month (originally NZ$4.35 billion).

Imports surged NZ$1.5 billion or 30 percent on year to NZ$6.57 billion, up from the upwardly revised NZ$6.50 billion a month earlier (originally NZ$6.49 billion).

In other news, New Zealand business sentiment fell in October as cost and inflation pressures intensified due to COVID-19 uncertainty, an ANZ Bank survey showed on Wednesday.

The survey’s headline measure showed a net 13.4% of respondents expected the economy to deteriorate over the year ahead. It compared with a 7.2% pessimism level in the September poll.

A net 21.7% of respondents expected their own businesses to grow in the next 12 months, higher than 18.2% from last month.

Short-Term Outlook

The jump in inflation is likely to keep pressure on the RBA to keep reducing monetary stimulus (tapering) in the months ahead, but it may not necessarily encourage policymakers to raise rates sooner than expected. The RBA is not likely to cave to pressure from investors to raise rates prematurely until the pace of wage growth increases.

Wage growth in Australia is running at a miserly 1.7% while Lowe argued it would need to top 3% at least to get underlying inflation up into the target band of 2-3%, something not achieved since 2015.

In New Zealand, the record deficit is not a concern after last week’s report showing “hot” inflation. The Reserve Bank (RBNZ) just raised its Official Cash Rate (OCR) for the first time in seven years and more are likely to follow as central bankers have their eyes set on trimming inflation without stifling the economy.