Australian dollar jumps as shock inflation data sends yields higher

THE Australian dollar jumped on Wednesday (Jan 25) after a surprisingly red-hot inflation report all but cemented the case for another interest rate hike from the Reserve Bank of Australia next month, sending bond yields sharply higher.

The Aussie jumped nearly 1 per cent to US$0.7114, its highest level since August, after a shock spike in inflation to a 33-year high last quarter spurred bets that the Reserve Bank of Australia (RBA) would need to continue raising rates.

The Aussie also rose against the Singapore dollar, with one Singdollar trading down 0.46 per cent to A$1.0707 as at 5.25pm.

“Today’s report should quickly eradicate hopes of an RBA pause in February,” said Matt Simpson, senior market analyst at City Index.

“With higher interest likely coming for Australia, China’s reopening and higher base commodity prices, the Australian dollar could be a tough currency to bet against.”

Australian inflation shot to a 33-year high of 7.8 per cent last quarter, beating an analyst consensus estimate for a 7.5 per cent rise, with price pressures broadening. For December alone, the CPI rose a startling 8.4 per cent.

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The shock result led markets to price in a 75 per cent probability that the RBA will lift its cash rate by another 25 basis points when it meets next month, squashing hopes of a pause.

Robert Carnell, regional head of Asia-Pacific research for ING, revised up his forecast for the cash rate to peak at 4.1 per cent, rather than 3.6 per cent previously.

“We had already been looking at our cash rate forecast with a view to revising it higher, and this latest data leaves us no option but to increase it,” said Carnell.

“Much of the recent inflation disappointment can be put down to one-offs, weather-related and other seasonal effects... . The main risk is that we may not yet have seen an end to the one-offs and seasonal shocks.”

Futures also moved to price in the risk of at least two more rate hikes from the RBA with swaps implying a peak above 3.60 per cent.

That compared with about a peak of 3.4 per cent just before the CPI release.

Yields on three-year government bonds reversed course to be up 8 basis points at 3.112 per cent, having been as low as 2.909 per cent earlier in the day. Ten-year yields were 3 basis points higher at 3.496 per cent.

The kiwi dollar, on the other hand, eased 0.3 per cent to US$0.6485, pulling further away from a seven-month high of US$0.6530 struck last week, as data pointed to inflation easing in the country.

Futures now see rates there peaking at 5.3 per cent, below the guidance level of 5.5 per cent previously provided by RBNZ.

The Aussie also surged almost 1 per cent against the kiwi to NZ$1.0932, counter to the depreciating trend seen since late last year. REUTERS