The Australian dollar has tumbled to a six-week low and three-year bonds rallied to record highs after surprisingly weak inflation data boosted calls for Reserve Bank rate cuts.
The Australian dollar slid as low as 70.31 US cents on Wednesday, a level not seen since March 11, after first-quarter inflation slowed to the lowest in three years to 0 per cent when analysts were looking for a 0.2 per cent increase.
Key measures of underlying inflation favoured by the Reserve Bank of Australia (RBA) averaged 1.4 per cent for the year, marking 13 quarters below the central bank’s target range of 2 to 3 per cent.
In 2016, the last time inflation was this tepid, the RBA reacted with two rate cuts to the current record low of 1.50 per cent. It has since sat on the fence on policy, awaiting a pick-up in prices and a drop in the unemployment rate.
Wednesday’s data fuelled more calls for a rate cut, with ING Bank, JP Morgan and Citi becoming the latest to predict an easing as early as next month.
“Australian inflation shows no signs of coming anywhere near the central point of the RBA’s 2-3 per cent range, and we are biting the bullet and changing our ‘on-hold’ call for the RBA to a cut, possibly as early as the 7 May meeting,” ING economists said in a note.
“We can’t now see how the RBA can ignore such a bad inflation miss, even with last week’s strong employment gains.”
Wednesday’s weak inflation report set government bond futures on fire, with the three-year bond contract surging to a record high of 98.750 sending yields below the cash rate to 1.25 per cent.
Interest rate futures sharply narrowed the odds on an easing. The probability of a May 7 cut doubled to 44 per cent and a quarter-point move was fully priced for July, compared to an October timing earlier this week.
Across the Tasman Sea, the New Zealand dollar was 0.5 per cent down at $0.6627, languishing near its lowest since early January. The kiwi has fallen or stayed almost flat in nine of the last 10 sessions.
The currency has been in a downward trend since late March after the country’s central bank abandoned its long-standing neutral bias to say its next move in interest rates was likely down.
That followed underwhelming inflation data that further boosted the probability of a rate cut in New Zealand.
New Zealand government bonds were slightly higher with yields down about 5 basis points at the long end of the curve.