Australian dollar slips, bonds rally as inflation fails to shock

SYDNEY: The Australian dollar dipped on Wednesday as local inflation data proved not to be quite as white-hot as the market had wagered on, lengthening the odds on a super-sized rate hike and boosting bonds.

The Aussie eased to $0.6922 and away from Tuesday’s five-week peak of $0.6984. Chart support now lies around $0.6878 and it drew indirect assistance from selling in the euro which hit a three-month low overnight.

It was not helped by data showing consumer price inflation climbed to an annual 6.1% in the second quarter, which while the highest in 21 years was still not as extreme as many had bet on.

Core inflation did pick up to a record peak of 4.9%, but again was not considered alarming enough for the Reserve Bank of Australia (RBA) to hike rates by 75 basis points next week.

“There is limited evidence of a breakout in wage-driven inflation in the data, with volatile and imported goods accounting for much of the quarterly increase,” said Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics.

“We don’t think these data will change the RBA’s course, and still expect a 50 basis point increase at the August meeting.” That saw August interbank futures jump 8 ticks to 98.235, implying a half-point rise in the 1.35% cash rate. Swaps likewise erased the chance of a larger move, though they still imply rates will pass 3% by the end of the year.

Three-year bond futures climbed 9.5 ticks to 96.930 and test their July top of 97.000.

The next hurdle will be a US Federal Reserve policy meeting later Wednesday where a hike of 75 basis points is fully priced, with around a 25% chance of a full 100 basis points.

“We think the balance of risks are tilted to the Fed delivering a larger increase in the Funds rate (100bp) and/or a hawkish statement and press conference, and therefore a stronger USD,” said Kristina Clifton, a senior currency strategist at CBA, in a note.

That would be a negative for the New Zealand dollar which was lagging at $0.6229, having topped out at $0.6305 last week.

The market has also lengthened the odds on a 75-basis-point hike for the Reserve Bank of New Zealand (RBNZ) at its next policy meeting on Aug. 17.