Australia, NZ dollars ride risk recovery, rate cut priced in

Mint

8 hours ago

SYDNEY, June 25 (Reuters) - The Australian and New Zealand dollars edged higher on Wednesday as a truce in the Middle East seemed to be largely holding for the moment, outweighing a soft domestic inflation report that merely solidified wagers for a near-term rate cut.
Australia's monthly consumer price index fell 0.4% in May from a month earlier, taking the annual pace to 2.1% and well under forecasts of 2.3%.
The trimmed mean measure of core inflation slowed sharply to 2.4%, the lowest since late 2021 and under the mid-point of the Reserve Bank of Australia's 2% to 3% target range.
Importantly, the cost of buying a home cooled markedly after an unexpected spike in April, while inflation in the service sector slowed to a three-year trough of 3.3%.
The benign reading only reinforced investor expectations the Reserve Bank of Australia will cut its 3.85% cash rate by 25 basis points at its next meeting on July 8.
Markets now imply a 90% chance of a cut in July, and see rates bottoming at 2.85% or 3.10% by early next year.
"We had been sceptical for the RBA to cut in July initially, but our stance has softened over the past month," said Prashant Newnaha, a senior strategist at TD Securities.
"With the big downside miss in the CPI report, the RBA's likely comfort on most inflation metrics means we bring forward our prior Aug and Nov cuts, to July and Aug."
The Aussie was unfazed by the data, given a cut was already heavily priced in, and added 0.2% to $0.6502, having bounced 0.5% overnight to reach as far as $0.6519.
The recovery from Monday's deep low of $0.6373 has stabilised the technical position, but the recent top of $0.6552 remains distant.
The kiwi dollar rose 0.4% to $0.6032, putting it far above Monday's trough of $0.5883. Resistance now lies at $0.6040 and the recent eight-month peak of $0.6088.
Three-year Australian bond futures hit a two-month top of 96.760 on the inflation data, before running into profit taking. Yields on 10-year bonds were down at 4.1553, having come a long way from highs of 4.583% briefly touched in mid-May.
"Australia's weakening economic backdrop, combined with the RBA's dovish pivot, has improved the outlook for bonds," said Skylar Koning, a strategist at Barclays.
"Moreover, yields across the curve appear attractively priced, especially given our baseline expectation that the RBA will cut rates to 2.85%." (Reporting by Wayne Cole; Editing by Muralikumar Anantharaman)