Australia, NZ dollars try to bounce after Fed setback, eyes on Trump-Xi

SYDNEY, Oct 30 (Reuters) - The Australian and New Zealand dollars edged higher on Thursday after falling overnight in the wake of the U.S. Federal Reserve's decision to push back against expectations for a rate cut in December, a move that caused the greenback to rally.

Investor focus has now turned to a meeting in Busan, South Korea, between U.S. President Donald Trump and Chinese President Xi Jinping that will focus on trade and other thorny issues at 11 a.m. local time (0200 GMT).

The Australian dollar AUD=D3 rose 0.2% on Thursday to $0.6587, having fallen from a three-week high of $0.6617 overnight thanks to a hot domestic inflation report. It broke a five-day winning streak, with resistance heavy at $0.6630.

The kiwi dollar NZD=D3 also gained 0.2% to $0.5776 after dropping 0.3% overnight to pull away from a top of $0.5801.

Overnight, the Fed cut rates by a quarter point but pushed back against expectations for a reduction in December, which had been almost fully priced in by the markets. Short-term Treasury yields spiked in response and the U.S. dollar charged higher.

"USD can hold on to recent gains for a little longer in the absence of U.S. data," analysts at TD Securities said in a note. "Structurally, however, the macro backdrop supports a USD decline."

The sell-off in Treasuries proved to be a double whammy for Australia's bond market, which was already reeling from a hot quarterly inflation report that crushed hopes for any rate cuts from the Reserve Bank of Australia this year.

Three-year government bond futures YTTc1 slumped 7 ticks on Thursday to 96.35, the lowest since May, having already dived 12 ticks a day ago.

Swaps imply there is a 5% chance that the RBA will cut its 3.60% cash rate by a quarter point when it meets on Nov. 4, while a move in December is seen at less than 20%. There is talk among economists that the RBA's shallow easing cycle could be already over.

Paul Bloxham, chief economist for Australia, New Zealand and global commodities at HSBC, said he was convinced that the disinflationary impulse in Australia had stalled, while removing two more rate cuts from his forecasting profile.

"We now expect the RBA cash rate to be kept on hold at 3.60% in Q4 2025 and through 2026," he said. "We continue to see hikes in 2027."