Australian dollar slips, bonds jump as inflation quashes rate risk

SYDNEY: The Australian dollar dropped while bonds surged on Wednesday as June-quarter core inflation came in below forecasts, prompting investors to largely erase wagers on a near-term increase in interest rates. Markets now imply just a 2% probability of a further increase at the RBA’s next meeting on August 11, down from 22% prior to the data. Only 11 basis points of tightening are priced in by December, from 21 basis points previously. The Aussie weakened 0. 4% to stand at $0. 6946, having dipped 0. 2% in the previous session. Major resistance lies at a recent top of $0. 7026, with support at $0. 6913. “We no longer expect rate hikes by the RBA this year, ” said Luci Ellis, chief economist at Westpac, who had previously been looking for at least one more increase. “Inflation has been more benign than we feared, and than the RBA forecast. ” “There is still a risk of a hike in November if inflation picks up again in Q3, but that is not our base case. ” The key trimmed mean measure of core inflation rose 0. 8% in the quarter, compared to forecasts of 0. 9%, while the annual pace was also a tick under at 3. 6%. That would be a relief for the Reserve Bank of Australia which had looked for core inflation of 3. 8% in the quarter. It has raised interest rates three times this year to 4. 35% in an effort to eventually get inflation back down to its target band of 2% to 3%. “The softer-than-expected quarterly trimmed mean inflation print will probably prompt the RBA to leave rates on hold at its upcoming meeting, ” said Abhijit Surya, a senior APAC economist at Capital Economics. “But with cost pressures still elevated and the energy crisis far from resolved, the Board will probably reiterate that it will do what it considers necessary to achieve price stability. ” RBA Governor Michele Bullock on Tuesday reiterated that rates might yet have to be raised again should inflation not cool as hoped, though she also noted softness in the housing and labour markets. Australian 3-year bond futures celebrated the inflation report with a 10-tick jump to 95. 540, while 10-year bond yields fell 7 basis points to 4. 902%. The kiwi dollar was off 0. 1% at $0. 5780, having firmed overnight after finding bids at $0. 5763. More support lies at $0. 5744, with resistance around $0. 5873.

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