SYDNEY/WELLINGTON: The Australian dollar jumped half of a cent against the US dollar and euro on Wednesday as a sharp rise in domestic inflation and firmer Chinese data prompted markets to pare expectations on the speed and scale of further rate cuts.
The Aussie jumped to a high of $1.0318, from $1.0260 in early trade, so recovering losses suffered overnight when a drop on Wall Street spooked investors.
Much of the gains came after the HSBC China Flash PMI rose to a 3-month high of 49.1 in October, tempering worries about a hard landing in the world's second largest economy. The Antipodean currencies are very sensitive to news out of China, a key export market.
The Aussie was initially lifted by short-covering after data showed domestic consumer prices rose a surprisingly large 1.4 percent last quarter, partly due to the introduction of a carbon tax.
The reading prompted markets to lengthen the odds of a cut in interest rates next month with interbank futures factoring in a 50/50 chance of an 25 basis point-easing to 3.0 percent in November from 62 percent. Yet, a move lower remains fully priced in by Christmas, in part because much of the jump in inflation was due to one-off government measures.
"The RBA (Reserve Bank of Australia) would probably still view the AUD as high relative to commodity prices and restraining activity and thus may retain an easing bias," said Greg Gibbs, a strategist at Royal Bank of Scotland in Singapore.
"However, with inflation no longer appearing low, and China appearing more stable, there is less excuse to cut further."
The RBA cut its cash rate by 100 basis points between May and October as a slowdown in world growth and falling prices for major Australian exports clouded the economic outlook.
Immediate resistance for the Aussie is seen at $1.0325, while a break of a key barrier at $1.0334 would target $1.0395, the 50 percent retracement of the September-October move.
Support is found around $1.0150, a three-month low hit earlier this month.
Traders said a break above Tuesday's high of $1.0339, could see more short-covering.
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