Australia dollar slips 0.5% on soft inflation, NZD near 10-week high

[SYDNEY] The Australian dollar slipped on Wednesday after fourth-quarter inflation came in below expectations, underlining the risk that interest rates were still more likely to move down than up this year.

The Australian dollar fell 0.5 per cent to touch a low of US$0.7535. The retreat from US$0.7597 came after official data showed consumer prices rose 0.5 per cent in the quarter, below expectations for a 0.7 per cent rise.

Underlying inflation also missed forecasts with a 0.4 per cent rise, though the annual pace held around 1.5 per cent.

The subdued figures saw the Aussie clock its sharpest decline in a week. The currency had been on an uptrend since the beginning of January, hitting a 2-1/2 month peak of US$0.7609 earlier this week.

"It keeps the prospect of another rate cut well and truly alive," said Shane Oliver, chief economist at AMP Capital.

"These numbers highlight the downside risks to inflation in Australia and the risk that it will take longer to get back to the 2-3 per cent target for inflation."

Underlying inflation has languished below the central bank's target range since the first quarter of 2016, prompting two rate cuts since.

The futures market still sees only a 16 per cent chance of another cut by July, although the prospect of a rate hike later in the year is also slowly fading.

The Aussie slipped 0.4 per cent against its New Zealand cousin and also underperformed the euro and the pound.

The pound rose 0.8 per cent after the British Supreme Court ruled that the government must go through parliament to trigger talks on leaving the European Union.

The New Zealand dollar stood at US$0.7244, hovering near a ten-week high of US$0.7276 hit the previous day.

Investors will keep a close eye on New Zealand consumer price data on Thursday for confirmation inflation had returned to the central bank's target range.

New Zealand, like its Antipodean cousin, has also been struggling with anaemic inflation, forcing the central bank to cut rates three times last year.

New Zealand government bonds eased, sending yields 7.5 basis points higher at the long end of the curve.

Australian government bond futures were mixed, with the three-year bond contract unchanged at 98.010. The 10-year contract fell three ticks to 97.2450.

REUTERS