Australia dollar slips on soft inflation data, NZ dollar follows

[SYDNEY] The Australian dollar slipped on Wednesday after a subdued inflation report left the door open for an interest rate cut next week, dragging the New Zealand dollar down too.

The Australian dollar fell to US$0.7466, having briefly been as high as US$0.7568 after the report, to be down 0.4 per cent for the day.

Australian consumer prices rose at the slowest annual pace since 1999 last quarter while core inflation remained at a record low of 1.5 per cent, well under the Reserve Bank of Australia's (RBA) target band of 2 to 3 per cent.

The central bank holds its monthly policy review on Aug 2 and market pricing implies around a 50-50 chance of a cut to a record low of 1.5 per cent. Futures are fully priced for a move by November.

"On balance, we believe today's CPI is enough to get the RBA across the line for a cut in August, but the lack of downward surprise today, and better recent data, makes this a closer call," said Scott Haslem, an economist at UBS.

While the Aussie has bounced more than three cents since it hit a low in May, traders doubt the rally can last.

"We remain confident that gains since the May low are corrective as each leg higher is on less bullish momentum, so expect AUDUSD to break below 74 over the coming week," wrote Matt Simpson, a senior market analyst at ThinkMarkets.

Australian government bond futures pulled further away from recent record highs, with the three-year bond contract off 5 ticks at 98.510.

The 10-year contract fell 4 ticks to 98.0300, while the 20-year contract was steady at 97.5100.

The next focus will be on the US Federal Reserve's policy announcement later on Wednesday. Recent positive US economic data has increased expectations of a rate hike later in the year and dealers said a hawkish tone could light a fire under the US dollar.

The New Zealand dollar struggled to make any headway at US$0.7018, from US$0.7040 early, not far from a six-week trough of US$0.6952 touched last week.

It has skidded 1.7 per cent this month after the country's central bank flagged more rate cuts ahead, saying the currency had to go lower to generate a much-needed rise in inflation.

New Zealand government bonds eased, with yields up 5 basis points along the curve.

REUTERS