SYDNEY: The Australian and New Zealand dollars won some relief from selling pressure on Wednesday after a tame reading on US producer prices restrained the US dollar and pulled bond yields off their highs.
Aussie bulls are now hoping a reading of core consumer prices due later in the session will at least match forecasts of a 0.2% increase, as anything above could further limit scope for US rate cuts and lift the greenback once more.
The uncertainty left the Aussie still looking vulnerable at $0.6189, after eking out a 0.3% bounce overnight.
The recent five-year trough of $0.6131 is not far away, while resistance lies around $0.6205/10 and $0.6270. The kiwi dollar hovered at $0.5600, having rallied 0.4% overnight and off a two-year low of $0.5544.
It faces resistance at $0.5631 and $0.5692. Australian bonds steadied after 10-year yields briefly spiked as high as 4.721% on Tuesday, levels not seen since November 2023, before pulling back to 4.659%.
A rout in global bond markets has seen yields climb a steep 45 basis points in little more than a month, tightening domestic financial conditions at the margin and adding to the case for a cut in official rates.
Markets imply around a 70% chance the Reserve Bank of Australia will cut its 4.35% cash rate by 25 basis points at its next board meeting on Feb. 18, though much depends on inflation data due at the end of this month.
Analysts are hopeful core inflation will rise by 0.6% or less in the fourth quarter, the smallest increase since mid-2021, and open the door to a near-term easing.
Australia, NZ dollars get some relief before inflation test
Stephen Halmarick, chief economist at CBA, noted household consumption was also subdued with CBA’s own measure of spending sliding 1.8% in December as sales events in November pulled purchases forward.
“Given the weakness in spending, combined with the improving inflation environment, we continue to hold the view that the RBA can begin to lower interest rates at their first meeting of the year,” argued Halmarick.
“We also continue to expect 100bp of monetary policy easing through 2025, taking the cash rate down to 3.35%.”
Markets are much less dovish, with rates seen around 3.70% by year-end.
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