economy

Australian dollar skids to 3-month low as market gives up on rate hike

SYDNEY: The Australian dollar skidded to a fresh three-month trough on Wednesday after a softer reading on core inflation snuffed out speculation interest rates would have to rise again and boosted the bond market.

Data showed the headline consumer price index rose at an annual 3.8 per cent  in the second quarter, matching market forecasts. Crucially the key core reading slowed to a two-year low of 3.9 per cent, when analysts had looked for a steady 4.0 per cent.

Data on retail sales were more mixed but a drop in quarterly volumes showed consumption remained subdued overall.

Investors had feared much higher inflation numbers and quickly reined back the probability of a rate hike at the Reserve Bank of Australia's (RBA) policy meeting on Aug. 6.

"The upshot is that although underlying price pressures are running uncomfortably high, we suspect that the RBA will take some comfort from the fact that demand and supply are moving closer into balance," said Abhijit Surya, an economist at Capital Economics.

"Accordingly, we're sticking to our view that the Bank is done tightening policy."

Interbank futures jumped to imply almost no chance of a rise in the 4.35 per cent cash rate, from around 20 per cent before the data.

Three-year bond futures surged 23 ticks to 96.28, while 10-year bond yields dived 16 basis points to a one-month low of 4.13 per cent.

The Aussie duly dropped 0.7 per cent to $0.6491, breaching last week's trough of $0.65105. Support now lies at $0.6455 and $0.6363. The kiwi dollar was steadier at $0.5910, helped by gains against the Aussie.

More volatility is likely after the Bank of Japan policy meeting later in the session as markets speculated the central bank could raise rates by as much as 15 basis points, and cut the amount of government bonds it buys.

The Aussie has already slid 9 per cent to 99.65 yen in the past three weeks as speculation built about a BOJ tightening.

The U.S. Federal Reserve is also due to meet and investors are wagering heavily it will lay the groundwork for a policy easing as soon as September.

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