FX comment – AUD gains after inflation firms

by: Roy Teo

  • AUD gains after inflation firms
  • Hurdle for RBA rate cut in May is higher
  • Fade the AUD recovery towards 0.7850-0.79

 

AUD gains after inflation firms

The Australian dollar (AUD) rose more than 40 pips to above 0.7760 after headline inflation in the first quarter declined from 1.7%yoy to 1.3%yoy, which is in line with market consensus. Education, alcohol and tobacco and housing were the main contributors while transport prices declined. However the CPI trimmed mean (or core inflation) which is the RBA’s preferred measure rose from 2.2% to 2.3% yoy. Looking at subcomponents, non tradable inflation rose from 2.3% in 2014 Q4 to 2.6% in 2015 Q1 while tradable inflation declined from 0.7% to -0.9% yoy. Another measure of inflation of goods and services excluding volatile items goods also rose from 1.9% to 2.1% yoy.

Hurdle for RBA rate cut in May is higher

Though we think that the RBA should lower the official cash rate sooner than later to stimulate the economy, this morning inflation print has increased the likelihood that the RBA will adopt a wait and see approach next month. Given that yesterday’s RBA minutes stated that they saw advantages in receiving more data to assess the impact of previous rate cut, we have pushed back our next ‘live date’ to 2 June. A delay by one month will give them more clarity on the government’s Budget (12 May) and business investment plans (28 May).

Fade the AUD recovery towards 0.7850-0.79

In the absence of key domestic data in the next one week, we think that the direction in the AUD will be driven by external events. Developments surrounding Greece (24 April Eurogroup meeting) and US advance Q1 GDP (29 April) will be of importance. We continue to favour fading the current recovery in the AUD towards 0.7850-0.79. It is also possible that RBA governor Stevens may ‘talk’ the currency lower during his speech at the Australian Financial Review Banking and Wealth Summit on 28 April. Our year end AUD/USD forecast remains unchanged at 0.72.