SYDNEY: The Australian dollar took a further knock on Wednesday while bonds extended their rally after a downward surprise in core inflation lessened the pressure for another hike in interest rates next month.

The Aussie eased 0.2% to $0.6614, the weakest level since mid-March.

It had dived 1% overnight on renewed banking fears after First Republic Bank reported a more than $100 billion plunge in deposits in the quarter.

The Antipodean dollar has major support at the March low of $0.6565.

Australian inflation eased in the first quarter, probably confirming it has past its peak.

Crucially, core inflation dipped below forecasts, suggesting less pressure for the Reserve Bank of Australia (RBA) to resume raising rates at its May 2 meeting, having paused in April after a 10-hike streak.

“Although the absolute level of inflation remains markedly above the RBA target, the weaker series offers further evidence that the rate hiking cycle has likely come to an end, as alluded to in cash rate futures,” said Dwyfor Evans, head of APAC macro strategy at State Street Global Markets.

“This (rate decision in May) now looks nailed on to be a meeting where the cash rate remains unchanged.”

Futures now imply only a 9% chance of a quarter-point rise in the 3.6% cash rate in May, compared with about 20% prior to the release of the inflation figures.

Australian dollar steals a march on kiwi after inflation surprise

Bonds rallied with three-year futures up 14 ticks to 97.06 on Wednesday.

Three-year bond yields eased 18 basis points to 2.975%, the lowest in nearly two weeks, helped also in part by a flight to safe assets on renewed banking fears.

Ten-years slid 15 bps to 3.324%. The kiwi dollar was flat at $0.6138, after losing 0.5% overnight to as low as $0.6132. It has support at $0.6125.