Australian dollar stays muted despite inflation jump

London

THE US dollar struggled to gain momentum on Wednesday (Oct 27), while the Australian dollar pared gains following a jump on surprisingly strong inflation data, and the Japanese yen edged up ahead of the Bank of Japan rate decision on Thursday.

Currency markets have been generally quiet in recent sessions as investors wait for the US Federal Reserve meeting next week.

Investors are also looking to policy announcements this week from the European, Canadian and Japanese central banks for clues on the outlook for rates against a backdrop of supply-side driven global inflation pressures.

At 1135 GMT, the US dollar index was little changed on the day at 93.896.

Short-term US Treasury yields spiked overnight as investors bet that inflation would bring forward interest rate rises, and they hovered just below these levels during the European morning session.

Standard Chartered FX analysts wrote in a client note that they expect currency market risk sentiment to be limited until the Fed next week, where "hawkish risks are still under-priced".

The Australian dollar was flat on the day at US$0.7504, having reached as high as US$0.7536 overnight after data showed that Australian core inflation sped to a six-year high in September, surprising the market. The data prompted a spike in short-term yields.

The Reserve Bank of Australia meets on Tuesday next week and market pricing is at odds with RBA policymakers' insistence that there will be no rate hikes before 2024.

"The Reserve Bank of Australia (RBA) might be forced into action after all," wrote Commerzbank analyst Antje Praefcke in a note to clients, referring to rising 3-year yields.

"The market is likely to increasingly assume that the RBA will have to rethink its expansionary monetary policy further due to economic and inflationary developments, which is likely to principally support AUD." The US dollar was down around 0.3 per cent against Japan's yen, with the pair changing hands at 113.76 - still within recent ranges and close to the four-year high of 114.695 the US dollar touched against the yen one week ago.

"Short-JPY positions have clearly become a very popular trade among speculators... but it still seems hard to see the yen finding sustained support at the moment," wrote ING FX strategists in a client note. REUTERS