The Australian dollar slipped on Wednesday after a surprisingly soft reading on domestic inflation stoked bets for an earlier cut in interest rates and pulled bond yields lower.
Annual growth in consumer prices slowed to a two-year low of 4.1% in the fourth quarter, below forecasts of 4.3% and down sharply from 5.4% the previous quarter.
Core inflation dived to 4.2%, from 5.2%, coming in comfortably below the Reserve Bank of Australia's (RBA) own forecast of 4.5%.
That will be a major relief for policy makers who had hiked rates as recently as November for fear inflation was not receding fast enough to meet their target of 2-3%.
"The weaker-than-expected reading paves the way for the RBA to cut interest rates sooner than most are anticipating," argued Abhijit Surya, an economist at Capital Economics, who is tipping a first move in May.
"If consumer spending and labour market data continue to surprise on the downside, as we think they will, concerns about overtightening will probably come to the fore."
The RBA is considered certain to keep rates at 4.35% at its policy meeting next week, and could soften its tightening bias.
Futures
0#YIB: rallied to imply around a 64% probability of a first rate cut in June, up from 54% before the data. A quarter-point cut was now more than fully priced for August and the total easing for 2024 moved to 48 basis points, from 42 basis points.0#RBAWATCH In contrast, markets are wagering on 132 basis points of U.S. rate cuts and 139 basis points for the EU.
Investors responded by pushing three-year bond futures YTTc1 up 6 ticks to 96.370, while 10-year bond yields AU10YT=RR eased to 4.105% and away from a recent top of 4.33%.
The Aussie was off 0.3% at $0.6581 AUD=D3 , moving away from a two-week top of $0.6625 hit on Tuesday. Support lies around $0.6556 and $0.6525, with resistance up at $0.6658.
The kiwi dollar held at $0.6129 NZD=D3 , having stretched as high as $0.6150 overnight. It faces resistance around $0.6180, with support at $0.6088.
The Reserve Bank of New Zealand (RBNZ) is also seen as done with rate hikes, though it has pushed back against market wagers for early and aggressive cuts.
Futures are fully priced for a quarter point cut in July, and for 86 basis points of easing over the year.
0#RBNZWATCH A survey of businesses out Wednesday showed confidence continued to pick up, but firms were cautious about their own trading prospects.
