Australia dollar hampered by risk aversion, kiwi by rate calls

By Wayne Cole

SYDNEY, Oct 2 (Reuters) - The Australian and New Zealand dollars had stepped back from recent highs on Wednesday as escalating tensions in the Middle East curbed risk appetite, while the kiwi also struggled with bets for sharply lower interest rates.

Sentiment did steady somewhat when Iran said its missile attack on Israel was finished barring further provocation.

The Aussie sat at $0.6882, having slipped 0.5% overnight and away from a 19-month top of $0.6942. Support lies around $0.6850 and $0.6790.

The kiwi dollar was down at $0.6285, after sliding 1.1% the previous session and leaving behind its peak of $0.6379. Near-term support comes in at $0.6254.

It took an added blow when BNZ and Westpac changed their outlook for rates to predict accelerated easing of 50 basis points in both October and November.

The Reserve Bank of New Zealand (RBNZ) meets next week and markets had already priced in an odds-on chance of a half-point cut in the 5.25% cash rate. However, investors had assumed rates would only drop by 25 basis points at the next meeting.

"A key driver behind this change in view has been the strong signs that the forward inflation profile will be much more benign in aggregate than we have seen since 2021," said Kelly Eckhold, Westpac chief NZ economist. "We anticipate a much slower, highly data dependent and uncertain path lower in the OCR in 2025," he added. "We have pencilled in 25bp cuts in each of the February and May taking the OCR to the long-term terminal rate of 3.75%."

Markets are even more dovish and have now shifted to imply 95 basis points of easing by the end of this year, with rates under 3.0% by the end of 2025.

Two-year swap rates also fell sharply to the lowest since mid-2022 at 3.49%.

The Reserve Bank of Australia (RBA) is expected to be far more restrained, with markets implying just a 20% chance of a cut at its next meeting on Nov. 5.

They are pricing in a 72% probability of a quarter-point cut in the 4.35% cash rate for December and see a gradual drop to around 3.35% by the end of next year.

The Aussie has also been underpinned by China's sudden burst of stimulus steps, including speculation Beijing will announce a fiscal spending package of around 4 trillion yuan next week. (Reporting by Wayne Cole Editing by Shri Navaratnam)