Aussie, Kiwi Tumble Despite Higher than Expected Inflation

The Australian and New Zealand Dollars were hit hard last week as a flight from risk globally combined with aggressive pricing for U.S. rate hikes lifted the U.S. Dollar to multi-year highs against the two currencies. The negative news offset strong domestic inflation data that drove up the chances of central bank rate hikes by the Aussie and Kiwi central banks.

Last week, the AUD/USD settled at .6996, down 0.0179 or -2.50%. The NZD/USD finished the week at .6542, down 0.0171 or -2.55%. The Invesco CurrencyShares Australian Dollar Trust ETF (FXA) closed the week at $69.37, down $1.85 or -2.60%.

US Dollar Boosted by Aggressive Federal Reserve

The Federal Reserve on Wednesday said it is likely to hike interest rates in March and reaffirmed plans to end its bond purchases that month in what U.S. central bank Chief Jerome Powell pledged will be a sustained battle to take inflation.

Subsequent interest rate increases and an eventual reduction in the Fed’s asset holdings would follow as needed, Powell said, while officials monitor how quickly inflation falls from current multi-decade highs back to the central bank’s 2% target.

Much was left undecided, Powell told reporters after the end of the Fed’s latest two-day policy meeting, including the pace of subsequent rate hikes or how quickly officials will let its massive balance sheet decline.

Put Powell was explicit on one key point:  that with inflation high and for now apparently getting worse, the Fed this year plans to steadily clamp down on credit and end the extraordinary support it has provided to the U.S. economy during the coronavirus pandemic.

Australian Inflation Surges in Q4, Traders Betting on Early Rate Hike

Australia’s core inflation flew to its fastest annual pace since 2014 in the December quarter as fuel and housing costs led broad-based price pressures, a shock that will stoke market speculation of an early hike in interest rates.

Data from the Australian Bureau of Statistics out on Tuesday showed the headline consumer price index (CPI) rose 1.3% in the fourth quarter and 3.5% for the year, topping forecasts.

The trimmed mean measure of core inflation favored by the Reserve Bank of Australia (RBA) jumped 1.0% in the quarter, the largest increase since 2008.

The annual pace picked up to 2.6%, above both the 2.3% forecast and the middle of the RBA’s 2% to 3% target range.

Analysts are now trying to bring forward the likely timing of a hike from the RBA following the spike in fourth-quarter inflation.

Westpac and CBA are now tipping a first rate rise to 0.25% in August, with NAB looking for November and ANZ still in 2023.

New Zealand Annual Inflation Surges to 30-Year High

New Zealand’s annual consumer price index (CPI) hit a three-decade high in the fourth quarter, outpacing analyst forecasts and cementing a view that the central bank will look to tighten monetary policy further next month.

Annual inflation rose 5.9%, from 4.9% in the previous quarter, rising at the fastest rate since a 7.6% annual increase in the year to the June quarter of 1990, Statistics New Zealand said in a statement last Thursday.

CPI rose 1.4% in the quarter ending December from a rise of 2.2% in the third quarter.

The data topped economists’ expectations in a Reuters poll for a 1.3% rise for the quarter, with an annual rise of 5.7%. In its November monetary policy statement, the Reserve Bank of New Zealand (RBNZ) forecast a 1.2% rise in quarterly CPI and an annual rate of 5.7%.

The RBNZ, which is due to meet on February 23, has already hiked rates twice at its last two meetings, and signaled further tightening this year as it looks to keep inflation near its target 1.3% range and cool a red-hot housing market.