SYDNEY: The Australian and New Zealand dollars were robbed of momentum on Wednesday after an unwelcome, if modest, upside surprise in US inflation pushed up Treasury yields and triggered losses for local bonds.
Investors reacted by further paring the chance of a rate cut from the US Federal Reserve in June to 68% from 73%.
A month ago, markets had priced in a 90% chance of a June easing.
The broader shift has been echoed in Australia where the chance of a quarter-point cut in the 4.35% cash rate in June is 50-50, and August is now the preferred month with an implied probability of 90%.
The Reserve Bank of Australia’s (RBA) next policy meeting is on March 19 and markets show almost no chance of a change in rates, and only limited speculation it might abandon a bias toward tightening.
“We see the RBA shifting to a neutral stance by the May meeting,” said Adam Boyton, head of Australian economics at ANZ.
“We continue to favour a November start to the rate cut cycle, although current evidence of inflation moderating raises the risk of an earlier start to the easing cycle.”
Australia, NZ currencies hit one-month lows on yen, subdued against US dollar
The next reading for February inflation is due on March 27 and, since it includes a broader range of services than the January index, could see annual inflation edge up from 3.4%.
Over in New Zealand, there was mixed news as food prices fell 0.6% in February, unwinding some of January’s jump and pulling annual food inflation to its lowest since May 2021 at 2.1%.
Food makes up almost 19% of the consumer price basket.
However, that was offset by a jump in travel costs and overseas accommodation which muddies the outlook for the CPI for all of the first quarter.
In the forex market the Aussie was holding at $0.6606, having dipped as deep as $0.6583 after the US data. Support lies around $0.6562 with resistance up at $0.6667.
The kiwi dollar was flat at $0.6147, after easing 0.3% overnight to as low as $0.6136.
Support comes in around $0.6125 and major resistance at $0.6217.
Australian bonds also took a knock from the US data, with three-year bond futures back at 96.360 after losing almost 6 basis points on Tuesday.
New Zealand two-year swap rates edged up 2 basis points to 4.85%, but remain well below the 5.26% peak hit last month.
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