The Australian dollar tumbled to six-week lows on Wednesday and three-year bonds rallied to record highs after surprisingly weak inflation figures boosted calls for rate cuts, while the New Zealand kiwi stayed near a four-month trough.
The Australian dollar AUD=D4 slid as low as $0.7031, a level not seen since March 11, after first-quarter inflation slowed to the lowest in three years to 0 percent when analysts were looking for a 0.2 percent increase.
Key measures of underlying inflation favoured by the Reserve Bank of Australia (RBA) averaged 1.4 percent for the year, marking 13 quarters below the central bank's target range of 2 to 3 percent.
In 2016, the last time inflation was this tepid, the RBA reacted with two rate cuts to the current record low of 1.50 percent. It has since sat on the fence on policy, awaiting a pick-up in prices and a drop in the unemployment rate.
Wednesday's data fuelled more calls for a rate cut, with ING Bank, JP Morgan and Citi becoming the latest to predict an easing as early as next month.
"Australian inflation shows no signs of coming anywhere near the central point of the RBA's 2-3 percent range, and we are biting the bullet and changing our 'on-hold' call for the RBA to a cut, possibly as early as the 7 May meeting," ING economists said in a note.
"We can't now see how the RBA can ignore such a bad inflation miss, even with last week's strong employment gains."
Wednesday's weak inflation report set government bond futures on fire, with the three-year bond contract YTTc1 surging to a record high of 98.750 sending yields below the cash rate to 1.25 percent.
Interest rate futures
0#YIB: sharply narrowed the odds on an easing. The probability of a May 7 cut doubled to 44 percent and a quarter-point move was fully priced for July, compared to an October timing earlier this week.Across the Tasman Sea, the New Zealand dollar NZD=D4 was 0.5 percent down at $0.6627, languishing near its lowest since early January. The kiwi has fallen or stayed almost flat in nine of the last 10 sessions.
The currency has been in a downward trend since late March after the country's central bank abandoned its long-standing neutral bias to say its next move in interest rates was likely down.
That followed underwhelming inflation data that further boosted the probability of a rate cut in New Zealand.
New Zealand government bonds were slightly higher with yields down about 5 basis points at the long end of the curve.
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