The Australian and New Zealand dollars stabilized on Wednesday following a surge in their U.S. counterpart. However, a disappointing inflation reading in Australia further dampened the prospects for additional interest rate hikes.
The Australian dollar inched up by 0.1% to $0.6699, after slipping to $0.6677 from its previous session’s peak of $0.6734. Chart support for the currency is expected around $0.6641.
The New Zealand dollar also weakened to $0.6238, down from its high of $0.6267 on Tuesday. The currency is facing resistance at $0.6285 and support at $0.6182.
In Australia, monthly data on consumer prices revealed a significant decline in annual inflation to a near two-year low of 4.3% in November. This marks a noteworthy slowdown from the 4.9% recorded in October and 5.6% in September.
Base effects suggest that the annual pace could drop further to approximately 3.5% in December, aligning it more closely with the Reserve Bank of Australia’s (RBA) target band of 2-3%.
Core measures of inflation have also cooled down enough to indicate that inflation for the entire fourth quarter will likely fall short of the RBA’s forecast, reducing the urgency for further tightening.
The quarterly inflation figures are scheduled to be released on January 31, shortly before the RBA’s policy meeting on February 6.
Economist Andrew Boak of Goldman Sachs commented on the situation, stating, Underlying inflation pressures look to be trending lower, including across services components, although we are mindful of measurement issues with the monthly data and will be putting more weight on the quarterly CPI release. We continue to expect the RBA to remain on hold in the near term before starting an easing cycle in August.
Market expectations have already eliminated the possibility of another hike in the 4.35% cash rate, with indications of approximately a 40% chance of a first rate cut by May and 72% for June.
Despite these developments, the bond market did not significantly react, as three-year futures remained unchanged at 96.29. The implied yield of 3.71% is well below the overnight rate.
Investors are also convinced that the Reserve Bank of New Zealand (RBNZ) has concluded its tightening cycle, despite its previous hawkish stance. Recent data suggests that the New Zealand economy may have slipped into a recession in the last quarter.
Swap rates currently imply a zero chance of another hike, and there is almost full pricing for a quarter-point cut in the 5.5% cash rate by May.
With inflationary pressures showing signs of weakness in both Australia and New Zealand, monetary policy is expected to take a more accommodative approach in the coming months.
(Note: This article has been generated based on provided details and does not include explicit notes about adherence to guidelines.)
