Australian dollar plays defence as data stokes rate cut risk

By Wayne Cole

SYDNEY, Jan 8 (Reuters) - The Australian dollar was back under pressure on Wednesday as data showing a slowdown in core inflation kept alive the prospect of a cut in interest rates as early as February.

A key measure of underlying inflation eased to 3.2% in November, from 3.5% the previous month, and closer to the Reserve Bank of Australia's (RBA) target band of 2% to 3%.

There was also a notable cooling in the cost of new housing, which had been a major driver of inflation, where annual growth rose at its slowest pace since mid-2021.

That would be welcome news to the RBA, which in December opened the door to an easing in its 4.35% cash rate should inflation moderate as hoped.

One wrinkle was that the labour market remains tighter than expected, with data showing job vacancies rebounded in the November quarter after two years of declines.

"The inflation backdrop is meaningfully better than the RBA's cautious forecasts," said Taylor Nugent, senior markets economist at NAB.

"Inflation is not a barrier to cuts and the risk of a February cut has increased further with today's data," he added.

Markets now imply a 61% chance the RBA will cut in February, up from 51% before the data. Rates were seen falling to around 3.57% by the end of the year, while U.S. rates are expected to level out as high as 3.95%. 0#AUDIRPR

The dovish outlook kept the Aussie pinned at $0.6226 AUD=D3, having eased back from a top of $0.6288 overnight. That was the second time it failed to crack resistance around $0.6300 and threatens support at $0.6220 and $0.6180.

The kiwi dollar lapsed to $0.5629 NZD=D3, from a peak of $0.5692. Support now lies at $0.5632 and $0.5588.

Both had nascent rallies snuffed out by a rise in the U.S. dollar after upbeat economic data lifted Treasury yields to fresh eight-month highs.

Australian bonds AU10YT=RR now pay 19 basis points less than Treasuries, compared to around 20 basis points more a couple of months ago.

New Zealand's 10-year paper NZ10YT=RR offers 9 basis points less than U.S. debt, the largest negative gap since late 2021. A year ago, they paid 80 basis points more.

Markets are still wagering the Reserve Bank of New Zealand will cut its 4.25% cash rate by an outsized 50 basis points in February given the economy is in a far deeper hole than previously thought. 0#NZDIRPR

(Reporting by Wayne Cole; Editing by Saad Sayeed)

((Wayne.Cole@thomsonreuters.com; 612 9171 7144; Reuters Messaging: wayne.cole.thomsonreuters.com@reuters.net))