SYDNEY/WELLINGTON: The Australian dollar surged three-quarters of a US cent on Wednesday after an unexpectedly sharp rise in inflation forced investors to greatly scale back wagers on another cut in interest rates.
The Aussie shot up to $0.8870, from $0.8790, as the high inflation reading badly wrong-footed speculators who had been short of the currency in the wake of soft jobs numbers last week.
Dealers said stops above $0.8850 were tripped, allowing the Aussie to pull further away from a 3-1/2-year trough of $0.8756 set on Monday.
It was last at $0.8855 with resistance seen at $0.8883, the 38.2 percent retracement of the $0.8756-$0.9087 move, and then $0.8900. The data showed Australia's main measures of underlying inflation climbed 0.9 percent in the fourth quarter, well above forecasts and the largest rise in over two years.
Annual underlying inflation of 2.6 percent was also the highest since 2011, leaving inflation in the upper half of the Reserve Bank of Australia's long-term target of 2 to 3 percent.
"The latest result is likely to see the Reserve Bank shift from debating the merits of another rate cut to a more neutral stance," said Savanth Sebastian, an economist at CommSec. "We believe that interest rates are likely to remain on hold over the next six months." Interbank futures fell steeply to imply a one-in-five chance of an easing by midyear to a record low of 2.25 percent. On Tuesday that had been at 50-50.
Swap rates swung back to pricing in a possible tightening on a 12-month horizon, albeit only of 5 basis points. That compared with 7 basis points of rate cuts before the data. Yields on two-year government debt jumped 13 basis points to 2.67 percent, wiping out gains made in the wake of last week's soft employment report.
Australian government bond futures also skidded from recent multimonth highs with the three-year bond contract down 13 ticks at 96.970.
The 10-year contract lost 9 ticks to 95.860, leading to a bearish flattening of the yield curve. The Aussie leapt against the euro, yen and pound. It made the biggest jump on its kiwi neighbour, having been pinned near eight-year lows on diverging economic and interest rate outlooks for Australia and New Zealand.
The Aussie rose more than 0.6 percent to a high of NZ$1.0658 before easing back a tad.
Against the greenback, the kiwi was steady at $0.8308 having touched a one-week high of $0.8342 on Tuesday.
"Immediate resistance lies ahead of the $0.8350 level, with shorter-term exporter appetite eyeing any retreat to a window in front of $0.8275," said BNZ strategist Kimberley Martin.
New Zealand had itself reported a surprisingly high reading of domestic inflation on Tuesday that fanned speculation the Reserve Bank of New Zealand might hike interest rates at its policy review on Jan. 30.
New Zealand government bonds were flat.
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