The New Zealand dollar bounced smartly on Wednesday after inflation data proved not nearly as soft as some bears had been wagering on, prompting a round of hurried short covering.
The kiwi NZD=D3 popped up to $0.6771, from $0.6720 ahead of the figures, and looked set to test resistance around $0.6785. Speculators had shorted the currency in the hope inflation would be weak enough to narrow the odds on a cut in interest rates.
Instead, the consumer price index topped forecasts with a quarterly rise of 0.1 percent, to keep annual inflation steady at 1.9 percent.
Crucially, a measure of non-tradable inflation favoured by the Reserve Bank of New Zealand rose a surprisingly strong 0.7 percent in the quarter. The annual pace picked up to 2.7 percent, the fastest since mid-2014.
"Core inflation is solid because of persistent and generally sticky areas of inflation, such as prices for housing and household utilities," said Jarrod Kerr, chief economist at Kiwi Bank.
"For rates and currency market traders, there was no smoking gun," he added. "There is no definitive evidence to justify the rate cuts priced into the Kiwi interest rate curve. That doesn't mean the cuts will or should be removed. Risks are aplenty."
Yields on two-year government paper NZ2YT=RR duly ticked up to 1.735 percent, from 1.71 percent, though that follows a massive rally in the past few months. They had been as high as 2.02 percent as recently as November.
The rise in the kiwi gave a small lift to the Australian dollar, which had lost ground overnight as a report of problems in Sino-U.S. trade talks soured risk sentiment globally.
The Aussie AUD=D3 was last at $0.7128, having fallen 0.4 percent overnight to as far as $0.7116.
Kaixin Owyong, an economist at National Australia Bank, noted the New Zealand CPI sometimes offered a guide on what to expect from Australia's inflation report, which is due out next week.
"Looking at the NZ CPI components that map across to the Australian CPI, suggests some upside risk," Owyong said. "For core inflation, we are lifting our trimmed mean CPI expectation to 0.4 percent q/q, from a range of 0.3 to 0.4."
NAB expects the headline index rose 0.3 percent in the fourth quarter, and 1.6 percent on a year earlier.
Australian government bond futures edged up as Asian equities slipped, with the three-year bond contract YTTc1 rising 1.5 ticks to 98.225. The 10-year contract YTCc1 firmed 1 tick to 97.7100.
