SYDNEY: The Australian dollar hit a one-week low on Wednesday as a surprisingly soft reading on domestic inflation stoked wagers on a near-term cut in interest rates, sending bond yields lower.
Data showed consumer prices rose 0.2% in the December quarter, while the annual pace slowed to 2.4% from 2.8%.
Core inflation dropped to an annual 3.2% versus expectations for 3.3%, and a separate reading for December alone put it at just 2.7%.
Markets reacted by narrowing the odds on a cut in the Reserve Bank of Australia’s 4.35% cash rate when it meets on Feb. 18.
Swaps imply a 75% chance of a quarter-point easing, while futures price it around 90% compared with recent levels of 80%.
“We have just enough evidence to conclude that disinflation has proceeded faster than the RBA expected, so the Board will have the required confidence to start the rate-cutting phase in February,” said Westpac chief economist Luci Ellis, who had previously thought they would wait until May.
“We see the RBA as remaining data-dependent from here and not in a hurry to move further,” she added.
“Conditional on further declines in inflation and some softening in the labour market, we see cuts in May, August and November, taking the terminal rate to 3.35%.”
Australian dollar steadies, gets limited lift from strong jobs data
Markets are currently pricing in a bottom of around 3.50%. Investors reacted by pushing three-year bond futures up to two-month highs, and they were last up 7 ticks at 96.230. Yields on 10-year bonds eased 6 basis points to 4.376%.
The Aussie slipped 0.3% to $0.6229, having already shed 0.6% on Tuesday amid a bout of global risk aversion. Resistance lies around $0.6330, with support at $0.6129.
The kiwi dollar eased to $0.5657, after losing 0.5% the previous session. Resistance stands at the recent top of $0.5723, with support at $0.5646 and $0.5561.
New Zealand’s inflation report was out last week and benign enough to underpin market expectations the Reserve Bank of New Zealand will cut the 4.25% cash rate by 50 basis points when it meets on Feb. 19.
The RBNZ’s chief economist stayed away from policy in a speech on Wednesday but also did not say anything to dissuade the market from its dovish view.
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