Australia, NZ dollars make most of greenback woes; inflation test looms

By Wayne Cole

SYDNEY, Jan 27 (Reuters) - The Australian and New Zealand dollars held near multi-month peaks on Tuesday as their U.S. peer came under broad pressure from uncertainty over ever-changing U.S. policy on trade and geopolitics.

The Aussie paused at $0.6912 AUD=D3, having surged more than 3% in the past five sessions to a 16-month high of $0.6941. That was a whisker from a 2024 peak of $0.69435 and a break would take it to territory last trod in early 2023. The next chart barriers are $0.7000, $0.7030 and $0.7158.

The kiwi dollar stood at $0.5971 NZD=D3, having hit a four-month top of $0.5999 overnight. It has climbed around 4% in the past week and faces resistance at $0.6007 and $0.6059.

In Australia, a strong employment report out last week also saw investors ramp up wagers on an early hike in interest rates, with much riding on consumer price data due on Wednesday.

All eyes are on the trimmed mean measure of core inflation for the December quarter where median forecasts are for a rise of 0.8%, which will lift the annual pace to 3.3% and above the Reserve Bank of Australia's target band of 2% to 3%.

The general assumption is that an increase of 0.7% or less would mitigate the risk of a rate hike when the RBA meets on February 3, while a rise of 0.9% or more would sharply narrow the odds. A quarterly increase of 0.8% would make it a line ball call.

Markets imply around a 60% chance of a quarter-point hike in the 3.6% cash rate next week and are likely to shift sharply on the inflation outcome. 0#AUDIRPR

"Along with uncomfortably high inflation and a robust 7% growth pace in both house prices and credit, it does look like an economy that can handle rate hikes," said Tim Baker, a macro strategist at Deutsche Bank.

"Australia has the highest 2-year and 10-year yields amongst G10 for the first time in 15 years, which should encourage better flows, " he added. "AUD has been catching up to rate spreads but has further to go, and there are increasing signs that super funds might hedge more of their dollar exposure."

Australia's A$4.5 trillion pension industry has nearly A$1 trillion invested in U.S. assets and has tended to have low hedging ratios. Any increase in hedging would involve the sale of U.S. dollars, likely putting upward pressure on the Aussie.