New Zealand dollar firms with inflation, Aussie follows

The New Zealand dollar pushed higher on Tuesday after a surprisingly hot inflation reading cemented expectations for further interest rate hikes, adding to inflationary pressure on bonds from surging fuel prices.

Yield spreads on both New Zealand and Australian bonds widened after Brent touched $90 and the Iran-aligned Houthis threatened a blockade on Saudi Arabian oil shipments.

The shift in spreads helped lift the kiwi dollar 0.4% to $0.5860 NZD=D3, and a break of resistance around $0.5863/65 would clear the way for a push to $0.59935.

The Aussie nudged up 0.1% to $0.7005 AUD=D3, having gained almost 0.3% overnight. It faces tough resistance at $0.7021, with support at $0.6913.

Data showed New Zealand consumer prices jumped 1.5% in the June quarter as petrol and diesel costs spiked, pushing annual inflation to 4.1%.

That was above the 3.9% forecast by the Reserve Bank of New Zealand and left investors pricing an 80% chance of another rate hike in September. Markets see rates reaching at least 3.0% by year-end, with a real chance of 3.25%. 0#NZDIRPR

"We expect that headline inflation will linger above 3% through the latter part of the year," said Satish Ranchhod, a senior economist at Westpac.

"The pace of rate increases remains dependent on the strength of economic conditions more generally," he said. "We think that hikes are most likely at the RBNZ's September and December policy meetings."

Yields on 10-year bonds NZ10YT=RR touched a one-month high of 4.755% on the data, widening the spread over Treasuries to +14 basis points from -7 basis points a couple of weeks ago.

Australian 10-year paper AU10YT=RR pays 38 basis points over Treasuries, up from 26 basis points a week earlier.

Inflation data for the second quarter are due next week and analysts expect the main core measure to rise around 0.9%, taking the annual pace up to 3.7%, from 3.5%.