The Australian dollar bounced after a reading on domestic inflation proved not to be as weak as bears had wagered on, forcing a spurt of short covering.
The Aussie got a helping hand from a further sharp rise in prices for iron ore, a major export earner for Australia and a big driver of mining profits and tax revenue.
Chinese iron ore futures jumped nearly six per cent on Wednesday to hit their daily upside limit, after Brazil’s Vale SA said it was cutting output following a deadly tailings dam disaster.
All of which lifted the Aussie 0.5 per cent to 71.91 US cents, and away from Tuesday’s trough of 71.38 US cents.
Australian data showed consumer prices rose 0.5 per cent in the December quarter and 1.7 per cent for the year, to slightly top forecasts.
Core inflation was much as expected at an annual 1.8 per cent, completing the third straight year under the Reserve Bank of Australia’s two to three per cent target band.
Speculators, however, had been counting on an even softer number and had to pare back bets on a cut in interest rates.
Futures now imply a 52 per cent probability of a quarter-point cut in the 1.5 per cent cash rate by the end of this year, compared to 70 per cent before the data.
“While it does not change the message that inflation is too low and has undershot the RBA’s target for several years now, the data, on their own, do not give additional ammunition to the growing rate cut speculation,” said Su-Lin Ong, head of Australian fixed income strategy at RBC Capital Markets.
“Nevertheless, a more sustained pick up in inflation remains challenging amid ongoing labour market slack, competitive pressures and structural headwinds to wages growth.”
The RBA holds its first policy meeting of the year next Tuesday and will update its economic forecasts on February 8.
Markets assume rates will remain unchanged but will be hyper-sensitive to any dovish turn in language from the doggedly upbeat central bank.
Australian government bond futures eased on the inflation news, with the three-year bond contract off five ticks at 98.245.
The 10-year contract fell 2.5 ticks to 97.745, as the yield curve steepened.