The foreign exchange market remains locked in narrow trading ranges with the exception of the Australian dollar which is close to 1.0% lower after weaker than expected inflation data. The overall annual CPI rate and the trimmed mean rate were 0.3 point lower than expected at 2.9% and 2.6% respectively in the first quarter. In this regard, the Bank of Tokyo-Mitsubishi UFJ (BTMU) thinks that the 1.0% drop in AUD/USD underlines how sensitive the market has become to the potential for the RBA to begin to shift toward a bias to tighten its policy stance. “We think we are nowhere close to that but if the overall annual CPI rate had moved over the 3.0% upper-end of the target band, as expected, then the AUD/USD may well have had another leg higher. Indeed, it would appear from today’s price action that this is what the market was positioned for,” BTMU argues.
“For now though, while AUD/USD is notably lower today, we do not see today’s report as reason to suggest a sustained move lower is imminent,” BTMU projects. “Arguments against a sustained move lower in AUD/USD would also include evidence that China growth appears to be stabilising. The advance HSBC PMI reading came in at 48.3 in April, a slight tick higher from 48.0. There remains concerns over weakness but the data at least suggests no further downturn has taken place of late. Recent steps to support growth in China and the potential for more also add to the case for the AUD/USD rate to remain reasonably well supported going forward,” BTMU adds.