The Australian dollar tumbled another 0.50% this morning amid disappointing first quarter inflation data. This report was the straw that broke the camel’s back as investors have been betting heavily on a pick-up in inflation that would have forced the RBA to revise its dovish stance. The headline inflation gauge rose 2.1%y/y in the March quarter, compared to 2.2% expected and 1.5% in the December quarter of 2016. This sharp increase has been mostly fuelled by the recovery in commodity prices. The core measure - that excludes the most volatile components - increased to 1.5%y/y from 1.3%, well below the central bank target range of 2%-3%.
This disappointing report suggests that the RBA’s next move will likely be a cut rather than a hike. AUD/USD lost more than 1.30% since Monday and is about to test the key support that lies at 0.7474 (low from April 12th). If broken, the door is wide open toward 0.7145 (low from May 2016). The risk is heavily skewed to the downside as investors will likely start to unwind their long AUD speculative positions - speculative net long positioning in the future market reached 37% of total open interest last week, according to data reported by the CFTC. In addition we likely see the resurgence of short US bonds positions as Trump’s reflation trade is making a comeback against the backdrop of investors who are desperately willing to believe in an upcoming growth boost in the US. We believe that the USD debasement is coming to an end and the Aussie is the first in line for the sell-off.
By Arnaud Masset