Australia, NZ dollars suffer setback, RBNZ feels rate heat

By Wayne Cole

SYDNEY, Sept 19 (Reuters) - The Australian and New Zealand dollars were smarting from a sharp setback on Friday after disappointing economic data at home lent support to more rate cuts, while their U.S. counterpart benefited from better news on jobs.

The kiwi was especially hard hit by a surprisingly steep contraction in the economy that led many analysts to add another rate cut to their outlooks, and even the chance of an outsized half-point easing in October.

"Underlying growth momentum remains weak with little evidence the easing cycle is gaining traction on key interest rate-sensitive parts of the economy," said Andrew Boak, an economist at Goldman Sachs, who now tips a cut of 50 basis points to 2.50% next month.

He then expects another quarter-point reduction from the Reserve Bank of New Zealand in November.

"We see a strong case for accommodative monetary policy settings in New Zealand and view the balance of risks to our revised rate forecast as skewed to the downside."

Markets are fully priced for a quarter point in cut October and imply around a one-in-four chance of 50 basis points. They also imply a total easing of 71 basis points compared to 50 basis points at the start of the week. 0#NZDIRPR

The key two-year swap rate NZDSM3NB2Y= is down 19 basis points for the week, the sharpest such decline since the U.S. tariff chaos of April.

The sea change left the kiwi down at $0.5881 NZD=D3, after diving 1.4% the previous session. The retreat left it a long way from the near two-month top of $0.6007 hit early in the week, and threatens support at $0.5833 and $0.5800.

The Aussie was flat at $0.6610 AUD=D3, having dropped 0.6% on Thursday partly in sympathy with the kiwi. That was a reversal from an 11-month peak of $0.6707 touched mid-week, but it still has support around $0.6580.

Yet it did steal a march on the kiwi rising 0.8% on Thursday to its highest since October 2022 at NZ$1.1278 AUDNZD=R.

"The cyclical story in AUD has looked increasingly sure-footed, with consumption/housing picking up, unemployment near balance and inflation looking stable," said analysts at JPMorgan in a note.

"NZ by contrast has seen a loss of growth momentum, while inflation is likely to breach the top of the target band, implying a more stagflationary mix," they added. "Our forecast is NZ$1.1300 for the cross for December."