WSJ:Australian Dollar Higher; CPI Data on Wed Will Shape RBA Calls
By James Glynn
SYDNEY--The Australian dollar was higher Tuesday as traders braced for the release of second quarter inflation data Wednesday, which will help determine the case for a further cut in interest rates.
Late Tuesday, the Australian dollar was trading at US$0.9271 compared with US$0.9212 late Monday.
A survey of 15 economists by the Wall Street Journal showed core inflation, which is the favored measured of price pressures among policy makers, is likely to be a low 0.5% in the quarter. Financial markets priced in a 68% probability of a rate cut in August. The government statistician will publish the inflation report at 0130 GMT.
"We expect significant Australian dollar sensitivity to any surprise in either direction," said Gareth Berry, currency strategist at UBS.
Australia's central bank has cut interest rates sharply since late 2011 to bolster non-mining parts of the economy as a mining investment boom peaks, so far with limited success.
"If dormant sectors of the economy are not revived in time to pick up the slack, then economic growth is likely to falter," Berry added. "A weaker currency will help this transition."
The Australian dollar has fallen by more than 10% in trade weighted terms since the start of May against a recovering U.S. dollar, and signs of economic slowdown in China and locally.
Todd Elmer, currency strategist at Citigroup said the key risk in the inflation report was a higher-than-expected result. He said such a shock was unlikely with inflation reports in other countries such as China and New Zealand showing few price pressures.
"While there appears to be less probability for a high-side surprise, this would likely have far more impact and could lend some further support to the Australian dollar," Elmer said.
"If the base case plays out, the CPI is unlikely to impede an RBA cut at the August meeting," he added.
