Australian dollar skids to 3-month low as market swerves to rate cuts
Adds analyst quote, BOJ decision, updates prices
By Wayne Cole
SYDNEY, July 31 (Reuters) -The Australian dollar skidded to a three-month trough on Wednesday after a softer reading on core inflation snuffed out speculation interest rates would have to rise again and sent bond futures surging.
Data showed the headline consumer price index rose at an annual 3.8% in the second quarter, matching market forecasts. Crucially, the key core reading slowed to a two-year low of 3.9%, when analysts had looked for a steady 4.0%.
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."
Indeed, the implied probability of a quarter-point hike swung from 20% before the data, to show a small chance of a rate cut next week. 0#RBAWATCH
Markets now seearound a 50% probability of an easing in November, when previously they had implied scant chance of a move until April.
"Inflationary pressures are easing and will continue to do so over 2024 alongside clearer signs of global disinflation, a very weak domestic household sector, and a softening labour market," said Andrew Boak, an economist at Goldman Sachs.
"We continue to expect the RBA to begin a gradual easing cycle by February 2025, with rate reductions proceeding at a 25bp/qtr pace to a terminal rate of 3.25%."
Three-year bond futures YTTc1 surged 24 ticks to 96.29, while 10-year bond yields AU10YT=RR dived 17 basis points to a one-month low of 4.12%.
The Aussie duly dropped 0.6% to $0.6498 AUD=D3, 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 NZD=D3, helped by gains against the Aussie.
More volatility was injected by the Bank of Japan which hiked its rates to 0.25%, from a range of zero to 0.10%, and signalled further tightening likely lay ahead.
The Aussie has already slid over 9% to 99.52 yen AUDJPY=R in the past three weeks as speculation built about a BOJ move.
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.
Reporting by Wayne Cole; Editing by Edwina Gibbs and Neil Fullick
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