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Australian dollar supported as odds lengthen on near-term rate cut

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The Australian dollar crept higher on Wednesday as data on domestic inflation proved no softer than expected, leading investors to price out almost any chance of a cut in interest rates next week.

[SYDNEY] The Australian dollar crept higher on Wednesday as data on domestic inflation proved no softer than expected, leading investors to price out almost any chance of a cut in interest rates next week.

The Aussie edged up to US$0.6862 and away from a recent trough of US$0.6810, but it faces tough resistance at its October top of US$0.6883.

The New Zealand dollar followed to US$0.6360, just off a US$0.6335 trough hit at the start of the week, and remains well short of this month's peak at US$0.6436.

While official figures confirmed inflation remained subdued in Australia, there had been speculation it would be even weaker and so revive the risk of a short-term policy easing.

Instead, the outcome was much as forecast with consumer prices rising 1.7 per cent in the year to September and a closely watched underlying measure up 1.6 per cent.

Both are well below the Reserve Bank of Australia's (RBA) long-term target band of 2-3  a key reason it has already cut rates three times this year to a record low of 0.75 per cent.

The lack of downside surprise in the latest quarter saw the futures market pare back the chance of a cut at the RBA's Nov 5 meeting to just 4 per cent and a move in December to 30 per cent.

Pricing for a February move has also been scaled back in recent days and now stands at 56 per cent, and the market currently sees no chance of rates going under 0.5 per cent.

"The headline inflation rate has bottomed, but it is creeping, rather than leaping, towards the target band," said Craig James, chief economist at CommSec.

"The language from policymakers suggest that they are very reluctant rate cutters from here. The RBA is expected to wait until at least February to decide if more stimulus is required."

The need for a move will be determined in part by what the Federal Reserve does with US rates, since the RBA might be forced to act just to prevent an export-sapping increase in the Aussie dollar.

The Fed is widely expected to ease later on Wednesday, but investors are less certain if that will be the last one. Any signal the Fed is done, would lessen the need for another RBA move and would tend to push up local bond yields.

Yields on three-year paper have already drifted up to 0.80 per cent, having hit an historic low of 0.60 per cent early in the month, while 10-year bonds paid 1.147 per cent.

The three-year bond futures contract was 2 ticks firmer on the day at 99.210, while the 10-year contract rose 4 ticks to 95.8550. 

REUTERS

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