Australia, NZ dollars brace for volatility as rate risk looms

By Wayne Cole

SYDNEY, Oct 27 (Reuters) - The Australian and New Zealand dollars flatlined on Tuesday as investors braced for major event risks in both countries that will set the outlook for interest rates in coming months.

The Aussie idled at $0.7020 , having eased 0.2% overnight after faltering at $0.7040 resistance. Support lies around $0.7005 and $0.6895.

The kiwi dollar edged up to $0.5690 , after losing 0.3% overnight. Resistance lies at $0.5710 and $0.5750, with support at $0.5668 and $0.5566.

The Reserve Bank of New Zealand is widely expected to lift its official cash rate a quarter point to 3.0% on Wednesday as high energy costs feed through to core inflation.

Markets also imply a 60% chance of a further hike in December and an eventual peak around 3.75%, above the central bank's own projection of 3.2%.

"The RBNZ meeting will be critical for the kiwi, particularly its guidance on the future policy path," said Mieneke Perniskie, a senior dealer at Kiwibank.

"Significant tightening expectations are already reflected in NZD pricing, which leaves the kiwi vulnerable to downside moves if these expectations aren't delivered."

For Australia, Wednesday sees the release of consumer price figures for the third quarter where the core inflation rate is forecast to rise a steep 1.0%, keeping the annual pace up at 3.6%.

That would be well above the Reserve Bank of Australia's target range of 2% to 3% and would only strengthen the case for a fifth interest rate rise this year.

Unusually, the RBA's top officials will be appearing before lawmakers at the same time the data is released and are likely to be asked for an instant reaction.

Markets imply a 66% chance the RBA will raise rates by 25 basis points to 4.85% when it meets on November 3, though that is widely assumed to be the peak of the cycle.

Philip Brown, head of research at FIIG Securities, argued the rise in unemployment to 4.7% in September will help limit further tightening.

"If the RBA does move to a cash rate of 4.85%, then the trend of weakening in the labour market is only likely to intensify," he said.

"If the run of weak data continues then the market might conclude the RBA will be actively cutting rates in 2027, rather than simply not raising them," he added. "In such a circumstance, there is plenty of scope for bond yields to fall much further."