Australia, NZ dollars steady on trade optimism; RBA still cautious on rates

By Wayne Cole

SYDNEY, Oct 28 (Reuters) - The Australian and New Zealand dollars held firm on Tuesday as signs of progress in global trade negotiations supported risk sentiment, while growing scepticism about an imminent near-term rate cut lifted Aussie bond yields.

Markets were forced to scale back pricing for an easing after Reserve Bank of Australia Governor Michele Bullock played down the importance of a spike in unemployment and reiterated the board's caution on policy.

She also heightened the focus on consumer price data, due on Wednesday, saying a 0.9% rise in core inflation would represent a "material miss" from the RBA's 0.6% forecast.

Analysts are generally looking for a rise of 0.8% in the trimmed mean measure, which would leave the annual pace stuck at 2.7%. Anything more would lift inflation away from the 2.5% mid-point of the RBA's 2%-3% target band.

"We continue to see the cash rate on hold at the November meeting with the RBA taking some time to regain confidence that inflation will settle near 2.5%," said Gareth Spence, head of Australian economics at NAB.

He is forecasting a 0.9% rise in core inflation for the third quarter and expects the September uptick in unemployment to 4.5% will mark the peak, as consumer demand shows signs of recovery.

Markets now imply around a 40% probability of a quarter point cut in the 3.6% cash rate at the RBA's meeting on November 4, down from 60% early Monday. One easing is still fully priced in by February. 0#AUDIRPR

U.S. President Donald Trump lavished praise on Japan's first female leader Sanae Takaichi in Tokyo on Tuesday, welcoming her pledge to accelerate a military buildup and signing deals on trade and critical minerals.

Three-year bond futures YTTc1 were down 4 ticks at 96.540, implying an yield of 3.46%.

The Aussie held at $0.6558 AUD=D3, having climbed 0.7% overnight. That took it away from the recent trough of $0.6438, but leaves it facing tough resistance around $0.6628.

The kiwi dollar edged up to $0.5779 NZD=D3, after adding 0.4% overnight to reach as high as $0.5794. Resistance now lies at $0.5808 and $0.5844.

Investors still assume the Reserve Bank of New Zealand will trim its 2.5% cash rate by 25 basis points in November, but have largely given up on the chance of a half-point easing. 0#NZDIRPR

The head of the RBNZ might offer fresh outlook at a speaking engagement on Wednesday, though the subject is central bank independence and business partnerships.