Australian dollar steadies, CPI data fails to move rate dial

SYDNEY: The Australian dollar was holding its ground on Wednesday as a retreat in oil prices helped risk sentiment globally, while data on inflation did little to challenge expectations of more rate hikes at home. The Aussie was near flat at $0. 6995, having been as low as $0. 6939 overnight before finding bids. Major support lies around $0. 6897, with resistance at $0. 7015 and $0. 7124. The kiwi dollar idled at $0. 5840, after bouncing from $0. 5795 overnight. Support comes at the week’s $0. 5765 low, with resistance at $0. 5891. Australian data showed consumer prices were unchanged in February, nudging the annual pace of inflation down to 3. 7%, from 3. 8% the previous month. Core inflation came in a tick below forecasts at 3. 3%, but stayed stubbornly above the Reserve Bank of Australia’s target range of 2% to 3%. Rising energy costs are almost certain to drive CPI inflation up in March. “The roughly 45% lift in petrol prices means that petrol itself will add around one percentage point to March quarter inflation, ” noted Diana Mousina, deputy chief economist at AMP. “In the near-term, we think the RBA will prioritise managing inflation expectations and hike interest rates in May, ” she added. “Another hike is possible if there is a larger pass-through of higher oil prices into other parts of spending and if inflation expectations remain elevated. ” Markets imply a near 50% chance the RBA will lift the 4. 1% cash rate at its next meeting on May 5, and could take rates as high as 4. 75% by year-end. Markets also assume the Reserve Bank of New Zealand will have to tighten this year, but have scaled back bets on an early move following cautious comments from RBNZ Governor Anna Breman. Pricing for May implies a 44% chance of a quarter point hike in the 2. 25% cash rate, compared to 68% at the start of the week. An increase is still almost fully priced for July and rates are seen ending the year at 3. 0%. Many analysts argue the market is being too aggressive. “Governor Breman’s emphasis on the medium-term outlook suggests it is unlikely the RBNZ will hike in response to a short-lived increase in prices, particularly given spare capacity in the economy, ” said Andrew Boak, an analyst at Goldman Sachs. “We continue to see the RBNZ on hold until December. ”

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