Aussie Climbs as Faster-Than-Seen Inflation Data Trims Rate Bets

Jan. 22 (Bloomberg) -- The Australian dollar climbed from near its lowest level in three years after a report showed annual consumer prices climbed by more than economists had forecast, damping bets on further interest-rate cuts.

The Aussie rose against all 16 of its major peers as traders reduced to 4 percent the odds of a February rate reduction by the Reserve Bank of Australia, from 17 percent yesterday, swaps data compiled by Bloomberg show. Demand for New Zealand’s kiwi may be supported after milk futures in Chicago jumped to a record. Dairy is New Zealand’s largest foreign-exchange earner, accounting for about 28 percent of exports.

“This reduces the market pricing of a further near-term RBA policy easing,” said Peter Dragicevich, a currency strategist at Commonwealth Bank of Australia in Sydney. “It will probably support the Aussie over the next couple of sessions.”

Australia’s dollar rose 0.6 percent to 88.58 U.S. cents as of 4:48 p.m. in Sydney after falling as low as 87.57 on Jan. 20, the least since July 2010. The Aussie gained 0.8 percent to 92.54 yen. New Zealand’s kiwi was little changed at 83.17 cents and was at 86.88 yen from 86.74 yen yesterday.

The trimmed mean and weighted median gauges of prices both rose 2.6 percent in the fourth quarter from a year ago, compared with a 2.3 percent gain forecast by economists, data today showed. The consumer price index climbed 2.7 percent, compared with an estimate for a 2.4 percent advance.

The central bank aims for inflation of between 2 percent and 3 percent on average.

‘Door Slamming’

“That sound is the door slamming shut for another RBA rate cut,” Annette Beacher, head of Asia-Pacific research at TD Securities Inc. in Singapore, wrote in a report. “Our base case remains for the RBA to pause for many months to assist in the transformation of the Australian economy away from mining investment and towards exports.”

The Aussie will trade at 88 cents by mid-year and 87 by Dec. 31, she wrote. The median of forecasts compiled by Bloomberg is for it to fall to 85 by year-end.

The RBA has reduced borrowing costs by 2.25 percentage points to 2.5 percent since late 2011 as a record mining investment boom crests. There is now a 24 percent chance of a further cut by July, down from 45 percent yesterday, according to swaps data.

Australia’s three-year bond yield rose 13 basis points, or 0.13 percentage points, to 3 percent, on course for the biggest daily move since October.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net