Westpac: Softer USD to support AUD/USD over week via FXWW Chatroom

The two most important Australian data releases this month have both surprised on the fi rm side, injecting new uncertainty into the RBA decision on 5 May. Pricing for a cash rate cut to 2.0% in May had been around 75% before the strong Mar employment report and fell to almost 50/50 in the wake of the Q1 infl ation data (it starts this week around 55%). But it is hard to be confi dent that a cycle high is in place for the unemployment rate, if GDP only grows 2.2% over 2015 as Westpac forecasts. Last week, RBA governor Stevens said that “aggregate demand still seems on the soft side as resources investment falls sharply, and unemployment is elevated.” 
It is also very debatable that the CPI data will have much impact on the RBA Board’s deliberations next week. Headline and core measures were slightly higher than consensus but at 1.3% y/y total and 2.3% y/y on underlying infl ation, there is no cause for alarm. It is hard to see the RBA changing its April meeting view that with “growth in labour costs subdued, it appears likely that infl ation will remain consistent with the target over the next one to two years, even with a lower exchange rate.” 
Governor Stevens told his audience in NY that the question of another rate cut “has to be on the table”. He also argued that further AUD decline is “very likely”, albeit “over time”. Yet after sliding on his speech, AUD/USD bounced hard on the barely above consensus inflation data. Having spent much of this year pricing in more than 50bp worth of further RBA cash rate cuts, markets are pricing around -40bp. The empty local calendar in the week ahead will only add to nervousness over the May decision but should at least help AUD/USD fi nd buyers on dips, especially in a week where US data could disappoint again. In particular, we see downside risks on US Q1 GDP and the Apr manufacturing ISM survey. The FOMC statement too is unlikely to help USD, especially if the Fed indicates a June rate hike to be unlikely.
 
This should keep AUD/USD supported on any dips towards 0.77 but trade beyond 0.79 could be a stretch as the RBA decision nears. 

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