The Australian dollar rose to a two-week high on Wednesday after a key measure of underlying inflation surprised on the upside, prompting markets to pare chances of an interest rate cut this year. The Aussie rose as high as $0.9439, up from $0.9387 and a level last seen on July 10. The closely watched trimmed mean price index rose 0.8 percent in the second quarter, ahead of expectations for a 0.6 percent rise. That took the annual rate to 2.9 percent, near the top-end of the Reserve Bank of Australia's (RBA) 2-3 percent target.
"This should scupper market speculation that the RBA has been edging closer to providing further policy support," said Stephen Walters, chief economist at J.P. Morgan in Sydney. Interbank futures fell across the strip, pushing their implied yields higher. The market now has a 28 percent chance of a rate cut priced in by year-end, compared with 50-50 earlier in the week. Australian bond futures were also knocked lower with the three-year contract shedding 5 ticks to 97.370. The 10-year contract eased 3 ticks to 96.605.
Against the yen, the Aussie raced to a two-week high at 95.71, pulling well away from a recent trough of 94.36. It also gained on a broadly weaker euro, which plumbed a fresh eight-month low of A$1.4256. The Aussie continued to outperform its kiwi peer, rising to highs not see in over a month at NZ$1.0876. This is partly because kiwi bulls have turned a bit cautious ahead of the Reserve Bank of New Zealand's (RBNZ) rate review on Thursday.
While the RBNZ is widely expected to deliver another 25 basis point rate hike, its fourth in as many reviews, many traders are bracing for the central bank to signal a breather. "Since the previous meeting in June, a constellation of economic developments raises questions about the urgency for OCR hikes. Most important among these developments are the sharp declines in dairy and log export prices," said Imre Speizer, analyst at Westpac in Auckland.
Indeed, growing expectations for the RBNZ to switch to a wait-and-see stance has driven the kiwi down nearly 2 percent from a peak of $0.8839 over two short weeks. It last traded at $0.8679, just a tad firmer on the day. "A double bottom seems to be forming at around $0.8650 in the New Zealand dollar, with a very real chance of a push lower through $0.8600 should the RBNZ try and jawbone the currency," ASB economist Christina Leung wrote in a note. Near-term support remained at $0.8650, with $0.8700 the first hurdle, then $0.8721. New Zealand government bonds traded with a bid tone, pushing yields 4.5 basis points lower at the long end of the curve.
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