Australia, NZ dollars bounce as risk stages comeback

SYDNEY, Oct 20 (Reuters) - The Australian and New Zealand dollars bounced on Monday as risk sentiment staged a comeback on U.S.-China trade optimism, while a high reading on kiwi inflation mostly left wagers for more policy easing intact.

The Aussie edged 0.4% higher to $0.6509 AUD=D3, breaking major resistance at the 65-cent level. It managed to finish last week with a small 0.2% gain, having hit a two-month low of $0.6440 earlier.

"AUD/USD will track modestly higher this week if the USD resumes its fall as we expect," said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia.

"Hopes are high that U.S. Treasury Secretary Bessent and his Chinese counterpart He Lifeng will resolve some trade issues this week," he said.

U.S. President Donald Trump said late on Sunday that he can lower what China has to pay in tariffs but China has to do things for the U.S. too. He added that he believed China would make a deal on soybean purchases.

Trump had blasted China over its sweeping new export restrictions on rare-earth minerals and magnets and threatened an additional 100% tariff on Chinese imports, rekindling fears of a trade war with Beijing ahead of his meeting with President Xi Jinping later this month.

The kiwi also rose 0.3% to $0.5743 NZD=D3, although it is not far from an eight-month trough of $0.5684, still undermined by prospects of more policy easing at home.

Data showed that New Zealand's annual inflation hit 3% in the third quarter, the top of the central bank's 1-3% target band, but the rise was just as expected and underlying measures remained well-behaved.

"The RBNZ had already for the past few months been flagging a 'material possibility' that Q3 CPI could print above their inflation target range ... So this print is a relief for the RBNZ," said Stephen Wu, an economist at UBS.

"Overall, this data leaves us feeling more confident that the RBNZ will cut the OCR by 25bps in November, with inflation not a barrier to further monetary policy easing."

Swaps imply a 25-basis point rate cut in November has been fully priced in, with a tiny risk that the RBNZ could surprise with another 50-bp move like it did earlier this month. There is almost a three-month gap between the November meeting and its next gathering in February next year.

New Zealand's ten-year government bond yields NZ10YT=RR rose 3 bps to 4.025% on the inflation data, after slumping 17 bps last week to the lowest since early 2023. The trend lower helped narrow the spread over Treasuries to about flat from over 30 bps in September.