Aussie stumbles

01 Feb, 2018

The Australian dollar stumbled on Wednesday as a tame reading on domestic inflation led investors to push out the likely timing of a hike in interest rates, with a move not fully priced in until early next year. The Aussie slipped 0.28 percent to $0.8062 after data showed consumer prices rose 1.9 percent in the year to December, just missing forecasts of 2.0 percent.
Underlying inflation was also stubbornly stuck at 1.9 percent, marking a record run of two years below the Reserve Bank of Australia's (RBA) target band of 2 to 3 percent. Investors reacted by widening the odds on a rate hike this year. Interest rate futures now imply around a 50-50 chance of a rise by September, compared to August before the data.
A move to 1.75 percent is not fully priced in until February 2019, out from November this year. Australian government three-year bond futures climbed 6.5 ticks to 97.790, while the 10-year contract added 4.5 ticks to 97.1800. The New Zealand dollar jumped on the struggling Aussie dollar, which lost 0.6 percent to NZ$1.0960. That prompted a surge in buying of the kiwi, which rose almost 0.5 percent to $0.7366 against the greenback.
With the absence of local data, analysts said offshore factors, including the US state of the union address, dominated. "Today's focus will be offshore...if President Trump's State of Union speech continues to suggest a more pragmatic view on trade this should provide some support for NZD/USD," said Con Williams, economist at ANZ Bank.
New Zealand government bonds gained, sending yields 2 basis points lower at the long end of the curve. "The RBA won't be worried at all about an inflation break-out given wages remain slow and spare capacity remains in the labour market," said Ivan Colhoun, chief markets economist at NAB.

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