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New Zealand dollar slips as rate rise proves anti-climactic

SYDNEY, Oct 6 (Reuters) - The New Zealand dollar eased on Wednesday after the country’s central bank raised interest rates for the first time in seven years and said further moves were likely, but also underlined the significant uncertainty caused by the coronavirus pandemic.

The Reserve Bank of New Zealand (RBNZ) raised rates by a quarter point to 0.5%, a decision well flagged in advance. All 20 analysts in a Reuters poll expected the hike.

The statement was balanced with further moves expected over time, but also an acknowledgement that the pandemic had longer-term implications for economic activity.

That limited the reaction in markets, with swap rates just a fraction firmer and the kiwi back at $0.6944 after a brief spike to $0.6980. It has support around $0.6860, with resistance at $0.6981 and $0.7030.

The market still sees rates reaching 1.0% by April and 1.5% by October.

Kiwibank chief economist Jarrod Kerr argued the kiwi was undervalued given strength in global commodity prices and the outlook for local rates.

“The RBNZ is likely to be a year ahead of the U.S. Federal Reserve, and possibly two years ahead of the RBA,” he said.

“The widening interest rate differentials, in NZ’s favour, point to further upside in the kiwi dollar toward $0.7500 by the end of the year.”

The Reserve Bank of Australia (RBA) expects to keep its rates at 0.1% out to 2024 reflecting years of weakness in domestic wage growth and inflation.

That outlook has kept the Aussie stuck around $0.7275 , with stiff resistance in the $0.7305/15.

While there had been some calls for a rate rise to temper raging house prices, the RBA argued that macro-prudential rules were the better tool.

Australia’s bank watchdog APRA duly acted by telling banks to raise the serviceability buffer on home loans.

“Today’s APRA announcement should be modestly supportive of bonds and, all else equal, takes pressure off the RBA to adjust its yield curve control and forward guidance,” said Su-Lin Ong, head of Australian fixed income strategy at RBC Capital Markets.

“It may be worth a few basis points lower in yield, especially as it looks like this is just the first step.”

Bonds could do with the help as yields globally have been rising in recent weeks amid concerns inflation may be more persistent than first thought.

Australian 10-year yields were at their highest since mid-June at 1.575%, and underperformed Treasuries with the spread moving to +2 basis points from -7 bps a week ago.

NZ 10-year bond yields are already up at 2.05%, levels not sustained since early 2019. (Editing by Kenneth Maxwell)

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