Australian, New Zealand Dollars find support as inflation continues to decline

Dollar in focus: The Australian and New Zealand Dollars stabilized on Wednesday after facing pressure from a strong rally in the US Dollar. Meanwhile, a softer-than-expected reading on Australian inflation further supported the argument against additional interest rate hikes.

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The Australian Dollar inched up 0.1 per cent to $0.6699, recovering from its earlier dip to $0.6677, having reached a high of $0.6734 in the previous session. 

Chart analysis indicates additional support for the Aussie around $0.6641. Similarly, the New Zealand Dollar retreated to $0.6238 from Tuesday's peak of $0.6267, with resistance at $0.6285 and support at $0.6182.

Monthly consumer price data from Australia revealed that annual inflation dropped to a nearly two-year low of 4.3 per cent in November, a notable slowdown from 4.9 per cent in October and 5.6 per cent in September. 

Base effects are expected to push the annual pace closer to 3.5 per cent in December, aligning more closely with the Reserve Bank of Australia's (RBA) target band of 2-3 per cent.

Core measures also cooled, indicating that inflation for the entire fourth quarter is likely to fall below the RBA's forecasts. This diminishes the urgency for additional tightening measures, with the quarterly numbers set to be released on January 31, just ahead of the RBA's policy meeting on February 6.

Andrew Boak, an economist at Goldman Sachs, noted, “Underlying inflation pressures look to be trending lower, including across services components, although we are mindful of measurement issues with the monthly data and will be putting more weight on the quarterly CPI release. We continue to expect the RBA to remain on hold in the near term before starting an easing cycle in August.”

Market expectations have already discounted the likelihood of another hike in the 4.35 per cent cash rate, indicating around a 40 per cent chance of a first cut by May, with 72 per cent for June.

This limited reaction from bonds, with three-year futures remaining unchanged at 96.29, reflecting an implied yield of 3.71 per cent, well below the overnight rate.

Concerns about a potential recession led markets to believe that the Reserve Bank of New Zealand (RBNZ) is unlikely to pursue further tightening, despite its hawkish rhetoric. 

Swap rates suggest a zero chance of another hike, and there is almost full pricing for a quarter-point cut in the 5.5 per cent cash rate in May.

(With Reuters Inputs)