AUD/USD Turns Lower as Weak Inflation Data Signals RBA Rate Cut in August

The Australian Dollar posted a volatile reaction to the Australian consumer inflation data on Wednesday, first rallying on the headline number, then turning lower after traders realized the annual rate was weak enough to warrant a rate cut by the Reserve Bank of Australia at next week’s meeting. The AUD/USD finished at .7469, down 0.0029 or -0.39%.

Quarter-on-Quarter Consumer Inflation for the second quarter met expectations at 0.4%. This was a marked improvement from the previous quarter’s -0.2%. Year-on-year Consumer Inflation was 1.0%, below the estimate of 1.1% and lower than the previous 1.3% reading. This number was below the RBA’s target. Trimmed Mean CPI (QoQ) for the second quarter was 0.5%, slightly better than the 0.4% forecast.
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Ahead of the report, traders were pricing in a 48 percent chance of a rate cut by the RBA at its August 2^nd meeting. This was based on the recent minutes of its July meeting that suggested the central bank was open to a rate cut if there was proof of an economic downturn.

The New Zealand Dollar fell in sympathy with the Australian Dollar with the NZD/USD finishing at .7018, down 0.0035 or -0.49%. The bearish inflation data from Australia likely means the Reserve Bank of New Zealand will likely cut rates at its August 11^th meeting.

The U.S. Dollar rebounded against the Japanese Yen on Wednesday after Tuesday’s sharp break failed to attract follow-through selling pressure. The USD/JPY finished at 106.212, up 1.597 or +1.53%. The Japanese Yen lost ground on expectations of significant monetary stimulus by the Bank of Japan on Friday when it makes its monetary policy announcement.

On Tuesday, the Yen posted its biggest gains in a month as investors expressed concerns over the scale of the government’s fiscal stimulus plan. Most of the major Forex participants expect the BoJ to announce more easing measures at its policy review on Friday. The new plan should include deepening negative interest rates and increasing its purchases of riskier assets such as stocks and government bonds. USD/JPY is currently trading at 105.64 up 0.79%.

Traders are estimating that Japan’s government is likely to inject 6 to 10 trillion Yen in direct fiscal outlays into the economy over the next few years under a planned stimulus package.

Later today, the Federal Open Market Committee is scheduled to conclude its two-day meeting with its statement on monetary policy. Traders do not expect the Fed to raise interest rates, but will watch for indications on the timing of the next hike.