Australian dollar edges up despite soft data, budget deficit forecast as greenback weakens

SYDNEY, March 26 (Reuters) - The Australian dollar was slightly higher on Wednesday as U.S. tariff risks drove down the greenback, leading traders to look past a soft local reading on inflation and the government's pre-election budget that forecast a deficit.

The Aussie AUD=D3 was 0.1% higher at $0.6308, recovering from an earlier wobble to as far as $0.6279 after data showed inflation in Australia slowed in February thanks to an unexpected drop in electricity prices.

It rose 0.3% overnight to as high as $0.6325.

The continued easing in price pressures across the housing sector should support the case of further policy easing from the Reserve Bank of Australia, although it is widely expected to skip a move at its meeting next week.

Commonwealth Bank of Australia (CBA) said it was gaining a higher conviction for a rate cut in May after the data. "Today’s data gives us more confidence the underlying inflation pulse remained relatively benign," said Stephen Wu, an economist at CBA.

UBS, however, had a different take on the data, arguing their model was showing a trimmed mean consumer price index rise of 0.8% for the first quarter, above the RBA's forecast of 0.7%, while Macquarie pushed out their rate cut call to August from May.

That raised the stake for the quarterly inflation report due at the end of April, with swaps continuing to imply there is about a 68% chance of a rate cut in May.

On Tuesday, the Australian government promised new tax cuts from 2026 onwards in a major push to win back disgruntled voters ahead of a tough election in May, tipping the budget back in the red.

Most analysts do not expect a material impact on inflation due to the still modest amount of tax relief. Local bonds were sold off, but losses were capped by the soft inflation figures.

Three-year bond futures YTTc1 fell to an intraday trough of 96.18 on Wednesday, before recovering somewhat to be just 5 ticks lower at 96.21.

The Australian government also plans to borrow more over the coming years, although the rise in debt issuance is still in line with expectations.

"We doubt the budget will materially affect RBA thinking, although the market may perceive that the probability of a rate cut has fallen a little with this budget," said Andrew Ticehurst, a senior economist at Nomura.

The kiwi dollar NZD=D3 inched up 0.2% to $0.5744 after finishing Tuesday largely flat.