Australian dollar tries to snap losing streak on inflation news

[SYDNEY] The Australian dollar edged up from six-week lows on Wednesday as inflation data proved a shade firmer than forecast, while its New Zealand cousin slipped to a three-week trough after a dismal reading on domestic business sentiment.

The Aussie crept up to US$0.6884, after earlier touching a trough of US$0.6862. Some sort of bounce was overdue given the currency has fallen for eight sessions in a row, the longest losing streak since 2015.

The kiwi went the other way easing 0.3 per cent to US$0.6589 and threatening chart support around US$0.6567.

The Aussie got a rare lift after data showed consumer prices rose 1.6 per cent in the year to June, a fraction above forecasts. Bears had wagered on a weaker number and were forced to cover short positions in its wake.

Underlying inflation remained uncomfortably low at 1.5 per cent and well short of the Reserve Bank of Australia's (RBA) target range of 2-3 per cent, underlining the case for recent cuts in interest rates.

Investors reacted by pairing back the chance of another cut in the next month or so, but a move to 0.75 per cent was still priced as an 84 per cent probability by October.

"We continue to expect the RBA to leave rates on hold at its meeting next week," said Ben Udy, an economist at Capital Economics.

"We think that current stimulus will prove insufficient to turn the tide on the economy so underlying inflation should ease further in coming months. That's why we expect the RBA will cut rates to 0.5 per cent by early next year."

Adding to the pressure for action is the rush by other central banks globally to ease policy in the face of trade worries and a slowdown in manufacturing.

The Federal Reserve is thought almost certain to cut US rates by a quarter point later on Wednesday and to leave the door open to further stimulus if needed.

Anything less than a dovish statement would tend to boost the US dollar and weigh on the Aussie and kiwi.

The latter was already in trouble after a measure of domestic business confidence dropped to an 11-month low in July amid gloom over the economic outlook.

The grim result only reinforced expectations the Reserve Bank of New Zealand (RBNZ) would cut rates by a quarter point to 1.25 per cent at its policy meeting on Aug 7, and likely move again by December.

"Despite generally good commodity prices and interest rates at record lows, the headwinds of a global slowdown and credit and cost constraints appear to be winning out," said Sharon Zollner, chief economist at ANZ in New Zealand.

"With the inflation outlook not consistent with the target midpoint we expect two more rate cuts this year, helping the economy to find its feet once more."

Yields on two-year bonds duly dropped two basis points to an all-time low of 1.04 per cent, while 10-year yields reached a trough of 1.468 per cent.

Australian three-year government bond futures eased a tick to 99.200, but that was from a record peak. The 10-year contract was also just off an historic high at 98.7950.

REUTERS