SYDNEY, Jan 25 (Reuters) - The Australian dollar jumped on Wednesday after a surprisingly red-hot inflation report all but cemented the case for another interest rate hike from the Reserve Bank of Australia next month, sending bond yields sharply higher.
Going the other way, the kiwi sagged and swap rates tumbled after data showed inflation there has likely peaked, with markets pricing in the view that the Reserve Bank of New Zealand might not have to be as aggressive as previously thought.
The Aussie surged 0.8% to a fresh five-month high of $0.7100, after rising 0.2% overnight. It now faces resistance at its August high of $0.7136.
Australian inflation shot to a 33-year high of 7.8% last quarter, beating an analyst consenus estimate for a 7.5% rise, with price pressures broadening. For December alone, the CPI rose a startling 8.4%.
The shock result led markets to price in a 75% probability that the RBA will lift its cash rate by another 25 basis points when it meets next month, squashing hopes of a pause.
Robert Carnell, regional head of Asia-Pacific research for ING, revised up his forecast for the cash rate to peak at 4.1%, rather than 3.6% previously.
"We had already been looking at our cash rate forecast with a view to revising it higher, and this latest data leaves us no option but to increase it," said Carnell.
"Much of the recent inflation disappointment can be put down to one-offs, weather-related and other seasonal effects... . The main risk is that we may not yet have seen an end to the one-offs and seasonal shocks."
Futures also moved to price in the risk of at least two more rate hikes from the RBA with swaps implying a peak above 3.60%. That compared with about a peak of 3.4% just before the CPI release.
Yields on three-year government bonds reversed course to be up 8 basis points at 3.112%, having been as low as 2.909% earlier in the day. Ten-year yields were 3 basis points higher at 3.496%.
The kiwi dollar, on the other hand, eased 0.3% to $0.6485, pulling further away from a seven-month high of $0.6530 struck last week, as data pointed to inflation easing in the country.
Futures now see rates there peaking at 5.3%, below the guidance level of 5.5% previously provided by RBNZ.
The Aussie also surged almost 1% against the kiwi to NZ$1.0932, counter to the depreciating trend seen since late last year. (Reporting by Stella Qiu; Editing by Edwina Gibbs)
