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Australia, NZ dollars keep rally alive before inflation test

The Australian and New Zealand dollars kept a rally alive on Wednesday as markets pondered the outlook for interest rates ahead of some key inflation reports.

The Aussie firmed to $0.6735, having added 0.4% overnight. It faces resistance at $0.6750 ahead of the recent seven-week top of $0.6808, while support lies at $0.6681.

The kiwi dollar crept to $0.6213, and away from the week’s low of $0.6162. Near-term resistance stands at $0.6225, ahead of its recent high of $0.6314.

Markets have nudged up the risk of the Reserve Bank of Australia (RBA) lifting rates in May following minutes of its April meeting.

Futures still only imply around a 20% chance of a quarter-point hike in the 3.6% cash rate, though that has doubled this week and analysts are generally more hawkish.

“A reasonable interpretation from the Minutes is that a further increase of 0.25% is a much more realistic outcome in May than was the case in April,” said Westpac chief economist Bill Evans. “That increase in May remains Westpac’s view.”

Much will depend on what the consumer price report for the first quarter shows on April 26, and particularly the trimmed mean which shocked with a jump to 6.9% the previous quarter. Evans said a pullback to around 6.5-6.6% was needed for the RBA to be confident that inflation would meet its 2-3% target by mid-2025 as projected. “A number significantly above that forecast would, presumably, put some doubt on the staff’s two-year path back to target and certainly see a response from the Board at the May meeting,” he added.

A pointer to the outcome could come from New Zealand’s CPI report due on Thursday, though the picture has been clouded by natural disasters and a major spike in food prices.

As a result, median forecasts are for the CPI to rise an annual 7.1%, down only slightly from the December quarter’s blistering 7.2% pace. Measures of core inflation are seen staying stubbornly high above 6%.

Markets imply a 75% chance the Reserve Bank of New Zealand (RBNZ) will hike by a quarter point to 5.5% in May, having already tightened by 500 basis points.

“There’s growing evidence that the RBNZ’s actions are beginning to dampen demand, but it wants to see more,” said Jarrod Kerr, chief economist at Kiwibank. “And until core inflation firmly turns south and expectations are re-anchored, we can only expect more from the RBNZ.” (Reporting by Wayne Cole; Editing by Muralikumar Anantharaman)

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