NZ dlr hits 2-month low as benign inflation strengthens bets on outsized rate cuts
SYDNEY, Oct 16 (Reuters) -The New Zealand dollar slipped to a two-month low and bonds rallied on Wednesday as soft inflation readings bolsteredbets for aggressive monetary easing, which also dragged its Australian counterpart lower.
New Zealand's consumer price index(CPI) rose 0.6% in the third quarter, below forecasts of a 0.7% increase. Annual inflation also slowed to 2.2% from 3.3% the previous quarter and back within the central bank's target band of 1-3%.
A measure of non-tradable inflation, which is largely domestic goods and services, remained high at 4.9%, although it did ease from 5.4% the previous quarter.
Markets are still betting on a half-point cut from the Reserve Bank of New Zealand in November after it stepped up policy easing with a reduction of the same magnitude just this month. However, they swung to price in a small risk of just 4% that it could deliver an even bigger 75 basis point cut. 0#RBNZWATCH
The kiwi NZD=D3 skidded 0.6% to $0.6046 and broke support at a key level of $0.6050. It now faces stiff resistance at the 200-day moving average of $0.6093.
Two-year swap rates NZDSM3NB2Y= fell 7 basis points to 3.69%, pulling away from a one-monthpeak of 3.7675% hit just a day ago.
"We don't see anything in today's data that'll deter the market from pricing in high odds of another 50bp cut in November, nor the RBNZ from delivering it," said Miles Workman, a senior economist at ANZ.
"The marginally weaker tone across the suite of core inflation measures could see talk of a 75bp cut gain some momentum, but for the RBNZ to consider that we'd likely need to see a much weaker Q3 labour market read than expected."
Indeed, Karen Silk, an assistant governor at the RBNZ, said on Wednesday there was still a lot of information between now and the November meeting, when asked about the possibility of a 75 bp move next month.
"While we target headline, as I said before, it's about sustainably holding it back at that level. And so we will be looking much more closely at core and non tradable as well," said Silk at an event in Sydney.
The moves in the kiwi also dragged the Aussie lower, with it last down 0.3% at $0.6682 and falling through a key level of 67 cents. It has support at $0.6626.
The two have been weighed down by the broad risk off tone in markets overnight as global stocks retreated on tech weakness and the uncertainty around the timing and extent of the various stimulus measures announced by China recently. FRX/
Sarah Hunter, an assistant governor at the Reserve Bank of Australia, said on Wednesday the central bank is monitoring data to see if inflation has stayed sticky and added that there are risks to both sides.
Inflation expectations, for example, have been well-anchored, she told a Citi event in Sydney.
Swaps imply just about 40% chance that the RBA can cut rates in December. 0#RBAWATCH
Reporting by Stella Qiu
Editing by Shri Navaratnam
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