The Australian dollar jumped higher on Wednesday after data showed a much stronger-than-expected acceleration in inflation in May, sending bonds tumbling as investors priced in a greater risk of another rate hike of interest.
The monthly consumer price index (CPI) showed annual inflation rose to 4.0% in May, from 3.6% in April and well above the 3.8% forecast. The key core measure also rose to 4.4%, the highest reading in six months and a major surprise.
The Reserve Bank of Australia (RBA) has previously warned that it is alert to risks of rising inflation, meaning another rate hike cannot be ruled out.
“This will give room for the RBA to continue beating the rate hike drum for the time being and will also support the AUD, particularly on crosses against central bank currencies which remain dovish,” said Charu Chanana, head of FX strategy of Saxo.
Markets quickly raised the probability of a rate hike to 39%, from 12% before the data, with a move likely in August following the release of the full second-quarter CPI report.
Futures also ruled out any possibility of a 4.35% cash rate cut this year, and implied just 20 basis points of easing by the end of 2025, compared with 44 basis points at the start of the day.
The Aussie rose 0.4% to $0.6675 and looks set to test resistance around $0.6679.
The New Zealand dollar lagged behind at $0.6117, after spending the past few days in a tight range of $0.6105/6140.
Australian three-year bond futures slipped 14 basis points to 95.970, the steepest daily decline in two months. Yields on 10-year bonds rose 11 basis points to 4.315%.
The CPI report for the June quarter is due on July 31, just days before the RBA policy meeting on August 7. The central bank expected a slowdown in core inflation, which averaged 3.8% in the quarter.
“Monthly data suggests that quartered average annual inflation may have remained around 4.0% in the second quarter,” said Marcel Thieliant, head of Asia-Pacific economics at Capital Economics.
“However, with the economy performing worse than expected, we think the RBA will take the upside surprise in its stride,” he added, and continues to expect the next move to be a cut early next year. (Report by Wayne Cole, edited by Shri Navaratnam)
