Australian dollar dips as slowing inflation argues for rate pause

SYDNEY: The Australian dollar dipped on Wednesday after a downside surprise in monthly inflation data helped solidify bets on a pause in interest rates hikes next week, and perhaps an end to the entire 10-month tightening campaign.

The Aussie eased back to $0.6692, after bouncing almost 0.9% overnight and away from support around $0.6625. Major resistance lies at the 200-day moving average of $0.6754.

The kiwi dollar held firm at $0.6255, having also rallied 0.9% overnight.

Support lies at $0.6182 with resistance around $0.6290. Australian data showed annual growth in the consumer price index (CPI) slowed to 6.8% in February, from 7.4% the month before and under market forecasts of 7.1%.

The index is volatile and not as reliable as the quarterly CPI series, but it is still watched by the Reserve Bank of Australia (RBA) as a timely indicator of price pressures ahead of its policy meeting on April 4.

“This data is another confirmation that inflation peaked in December, and we expect headline inflation to be around 4% by the end of the year,” said Diana Mousina, a senior economist at fund manager AMP.

“Given the weakening in domestic economic momentum, the slowing in inflation and the risks in the global banking sector we see the RBA keeping the cash rate on hold next week.”

Futures now imply only a 5% chance of a rate rise next week, compared to 15% before the CPI data.

Australian dollar struggles as market reverses course on rates

The market is now wagering heavily that rates have already peaked at 3.6% and the next move will be down, albeit not until the end of the year.

Three-year bond yields are also down at 2.90% and far below the overnight rate. Markets still imply the Reserve Bank of New Zealand (RBNZ) will hike by 25 basis points to 5.0% at its meeting next week, and see a risk of a further move to 5.25% in May.

Yet, two-year swap rates suggest a peak is near, having recoiled 60 basis points in the past three weeks to stand at 4.895%. “We believe rates should peak at either 4.75% or 5%, and pause for six months,” said analysts at Kiwibank. “Enough is enough, and the RBNZ has done more than enough.” “Ultimately, rapid rate rises will tame inflation,” they added.

“Weaker global growth will put downward pressure on commodity prices and commodity currencies like the kiwi. We still forecast a drop to $0.5500 by year end.”