Aussie Drops as Inflation Slows; Bond Yields Tumble

Australia’s dollar weakened and government bond yields sank to record lows after data showed consumer price inflation slowed in the first quarter, providing the nation’s central bank with scope to lower borrowing costs.

Yields on 10-year and five-year debt reached all-time lows as traders increased bets that the Reserve Bank of Australia will cuts its benchmark rate from 4.25 percent when it meets next month. The New Zealand dollar, nicknamed the kiwi, weakened as stocks in Asia extended a global slide. Concern that European leaders are struggling to muster support to fight the region’s debt crisis also weighed on the South Pacific currencies as investors spurned higher-yielding assets.

“The fact that it’s a more benign reading on inflation, you’ve got higher risk aversion -- all are likely to add pressure on the Aussie dollar,” said Mitul Kotecha, head of global currency strategy in Hong Kong at Credit Agricole CIB. “A 25-basis-point cut is the most likely outcome” of the RBA’s next meeting, he said.

The Australian dollar dropped 0.5 percent to $1.0270 as of 4:21 p.m. in Sydney. It fell as low as $1.0247, the weakest since April 11. The Aussie slid 0.7 percent to 83.16 yen. New Zealand’s currency declined 0.1 percent to 81.30 U.S. cents from yesterday when it weakened 0.6 percent. The kiwi depreciated 0.3 percent to 65.74 yen.

Record Low Yields

Australian bonds advanced, pushing the 10-year rate down by as much as 13 basis points, or 0.13 percentage point, to 3.638 percent, the lowest ever. The spread to similar maturity U.S. debt narrowed to 175 basis points, the least since Dec. 27. The yield on the five-year Australian note fell to a record 3.094 percent.

The so-called trimmed mean gauge of core consumer prices rose 0.3 percent from the previous quarter, the Bureau of Statistics said in Sydney today, compared with the median economist estimate for a 0.6 percent gain. The consumer price index increased 0.1 percent from the previous three months, compared with a forecast 0.6 percent gain.

The RBA has signaled that it may be willing to lower its benchmark interest rate from 4.25 percent in a bid to bolster the economy, provided prices remain in check.

RBA Rate Cuts

“The lower inflation outcome means that the RBA has very little reason to keep interest rates at current settings,” said Richard Grace, chief currency strategist and head of international economics at Commonwealth Bank of Australia in Sydney. “It’s going to put the Australian dollar under a bit of downward pressure for the next 24 hours or so, perhaps 48 hours.”

The Aussie has weakened against all 16 of its major peers today as investors speculate that the RBA will implement even deeper rate reductions than previously expected.

A Credit Suisse Group AG index based on swaps indicates traders are positioned for 108 basis points of cuts over the next 12 months, compared with 98 points yesterday. A related index shows traders are certain that the RBA will reduce rates by at least 25 basis points when it meets on May 1.

Political uncertainty in Europe is also limiting demand for the Australian and New Zealand currencies. Dutch Prime Minister Mark Rutte yesterday tendered his Cabinet’s resignation after talks over budget cuts collapsed.

In France, Nicolas Sarkozy’s grip on leadership is under threat after he attracted fewer votes than his Socialist rival in the first round of the country’s presidential election. The incumbent president will face off against Francois Hollande in a final vote on May 6.

‘Looking Vulnerable’

“Australia’s dollar is looking vulnerable, with strong support in the $1.0225 to $1.0260 area,” said Khoon Goh, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “If that breaks, we could see a slide toward $1.0125.”

The MSCI Asia Pacific Index of stocks declined 0.2 percent today after the MSCI All-Country World Index slid 1.4 percent yesterday. The Chicago Board Options Exchange Volatility Index, known as the VIX, climbed 8.8 percent to 18.97, its highest close in a week.

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