New Zealand dollar slips as RBNZ flags more easing, Aussie gains on crosses

The New Zealand dollar slipped on Wednesday after the country's central bank paused its easing cycle but said it still expected to lower rates further, while the Aussie held onto its gain on crosses.

The Reserve Bank of New Zealand held the official cash rate (OCR) unchanged at 3.25%, a decision that was widely expected. It added that policymakers expected to lower rates further if inflation eased as expected and in line with projections released at its May meeting.

The kiwi popped up to an intraday high of $0.6014, but that soon faded and it was last down 0.3% at $0.5977 for the seventh straight day of declines.

Two-year swap rates (NZDSM3NB2Y=) hit a two-week high but they soon reversed the gains to be flat at 3.16%. Investors are now leaning towards a cut in August, which is priced at 56%, with a total easing of 36 basis points expected until February next year.

Sharon Zollner, chief economist at ANZ, noted the May projections implied a cut either in July or August and another 15 bps of easing after.

"We continue to expect that the RBNZ will cut ... in August, with more easing to come after that as the risks tilt toward medium-term inflation being too low rather than too high," she said in a note to clients.

Just a day earlier, the Reserve Bank of Australia wrongfooted markets and held interest rates steady at 3.85%. That sent the Australian dollar higher, although it was running into some selling pressure around $0.6560.

The Aussie AUDUSD was down 0.2% at $0.6516, having gained 0.6% overnight. It fared better on crosses such as the Japanese yen and the kiwi.

It was up 0.2% at 95.90 yen AUDJPY, the highest in almost five months, after a 1% jump overnight. It also hit a nearly two-month top at NZ$1.09 AUDNZD on Wednesday.

Three-year government bond futures (YTTc1) extended their sell-off, down another 7 ticks to A$96.52, after an 11-tick tumble a day earlier.

The surprise hold decision from the RBA as it waits for the quarterly CPI report has raised questions among economists about the RBA's reaction function. Governor Michele Bullock said at a briefing that the RBA cannot guide market pricing given the rate decision was up to the board.

"The RBA’s reaction function is confusing financial markets, but more rate cuts are coming," said Josh Williamson, chief economist at Citi Australia and NZ, who tipped a steady outcome.

He added that the Q2 CPI result should be enough for the RBA board to cut rates in August, and expected another two rate cuts in September and November.

Analysts at Goldman Sachs, however, see the risks are skewed towards a deeper easing cycle if RBA's focus on quarterly inflation proves to be too backward looking and risks "falling behind the curve".