US Data and Aussie CPI Send USD Higher as NZD Weakened

The US economic data for July was in line with expectations, which led to an increase in US Treasury yields and the value of the USD. The core PCE deflator rose 0.2% month-over-month and 3.3% year-over-year, keeping pressure on the Federal Reserve to raise interest rates later this year.

Australia's CPI data for July showed a stronger-than-expected reading, with the headline rate falling only to 3.5% year-over-year and the trimmed mean steady at 3.6%. This has led the market to price in an increased chance of another rate hike from the Reserve Bank of Australia this cycle.

The Australian dollar (AUD) rose after the release, while the New Zealand dollar (NZD) weakened. The NZD/AUD cross fell by more than ½ cent since the CPI release and traded below 0.8290. The AUD reached a near two-month high of 0.7190 before meeting resistance.

Market experts warn that the Reserve Bank of New Zealand (RBNZ) needs to hike interest rates soon, given NZ's policy rate remains well below those of the US and Australia. Higher NZ inflation through the currency channel has been a recent feature and will persist unless the rates gap is closed significantly.