AUD/USD and NZD/USD Fundamental Daily Forecast – Aussie Hits Highest Level Since August on Hot Inflation Data

The Australian and New Zealand Dollars are posting mixed results early Wednesday following the release of key consumer inflation data from each country.

At first glance, the price action suggests that Australian speculators are betting on more aggressive rate hikes by the Reserve Bank (RBA) at next week’s meeting. While the movement in the Kiwi indicates central bank policymakers at the Reserve Bank of New Zealand (RBNZ) can afford to dampen their hawkish tone at next month’s meeting.

At 02:03 GMT, the AUD/USD is trading .7088, up 0.0043 or +0.61% and the NZD/USD is at .6485, down 0.0020 or -0.31%. On Tuesday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $69.67, up $0.13 or +0.19%.

Australian Dollar Jumps to More than Five-Month High

The Australian Dollar is testing its highest level since August on Wednesday after inflation data came in hotter than expected.

The Aussie rose sharply after a report showed Australian inflation shot to a 33-year high last quarter as the cost of travel and electricity jumped, a shock result that adds to the case for the country’s central bank to raise interest rates again next month.

Investors sharply narrowed the odds on the Reserve Bank of Australia (RBA) lifting its cash rate by a quarter point to 3.35% when it meets on Feb. 7, sending the local dollar up to a five-month high of .7094.

Data from the Australian Bureau of Statistics on Wednesday showed the consumer price index (CPI) surged 1.9% in the December quarter, outpacing market forecasts of 1.6%.

The annual rate climbed to 7.8%, from 7.3%, the highest since 1990 and more than twice the pace of wages growth. For December alone, the CPI rose a startling 8.4% compared to the same month a year ago, up from 7.3% in November.

Price rises were broad-based with a closely watched measure of core inflation, the trimmed mean, rising 1.7% in the December quarter. The annual pace accelerated to 6.9%, well above forecasts of 6.5%.

New Zealand Inflation High, but Not High Enough to Satisfy Bullish Traders

New Zealand’s consumer inflation held near three-decade highs last quarter but came in below the central bank’s forecast, prompting some analysts to bet that cash rate increases over the coming months might be less aggressive than previously thought.

Annual inflation ran at 7.2% in the fourth quarter unchanged from the third quarter and just below a three-decade high, Statistics New Zealand said in a statement on Wednesday.

Inflation was slightly above economists’ expectations in a Reuters poll for a 7.1% annual rise but was below the Reserve Bank of New Zealand’s forecast of 7.5% inflation.

On a quarter-on-quarter basis, the consumer price index (CPI) rose 1.4%, following a 2.2% increase in the third quarter.

Short-Term Outlook

The RBA can’t afford to pause its rate hikes in February as some investors had been betting with inflation pressures broadening yet further. We expect to see at least two more rate hikes this year with a peak coming in somewhere over 3.60%. This is supportive for the AUD/USD.

Meanwhile, the RBNZ can afford to take a slight break from its aggressive tightening with a 50 basis point rate hike next month instead of the 75 basis point rate hike that some had priced in at the start of the year.