The Aussie dollar strengthens ahead of the May RBA’s interest rate outcome scheduled today. Besides, the dollar index trading at the lowest point of the week and below August 2015 levels.

Overseas data: China Caixin manufacturing PMI scheduled today

SMH reported:

The market and analysts have “almost evenly split views on the outcome of Tuesday’s RBA Board meeting.  A result either way is likely to see market reaction.”  NAB’s view is that last week’s materially lower-than-expected Q1 CPI offers the RBA the opportunity “to add more support to the domestic economy, without risk to their inflation target, even with an economy that continues to reveal resilience in the face of the resources downturn”.

Citi Economics note that “With underlying inflation lower than expected and well below the bottom of the 2%-3% target, this makes next week’s Board meeting very much live, with a rate cut now a 50:50.”

ABN AMRO also suggest a rate cut in on the cards:

“Financial markets are now pricing in about a 60% probability that the RBA will lower the Official Cash Rate (OCR) by 25bp to 1.75% on 3 May.”

“Though we do not rule out that the RBA may choose to wait a bit longer to assess the trend in the job market and inflation outlook, we are of the view that there is sufficient evidence for the RBA to resume its monetary easing bias sooner rather than later.”

Subdued inflation pressures in the Survey and last week’s soft Q1 CPI print suggest the RBA has scope to cut today. These assessments of the growth and inflation are beginning to very much rhyme with the outlook for NZ. A cut by the RBA today would no doubt result in a knee-jerk fall in the AUD/USD, given it is only 50% priced by the market reported by interest.

“The RBA has never cut the cash rate while unemployment has been trending lower,” points out Scott Haslam, economist at UBS.

“Low inflation is more likely telling you about supply side pressures rather than weak demand,” he said. “So it’s a good story: consumers have better purchasing power, and even though nominal wage gains are low, real wage gains are doing better.”

Mr Haslam believes the RBA will stay on hold for the May meeting.

JP Morgan expects a 25-basis point cut in May, followed by a further cut in August.

The cross is trading at 0.7667 remains below 20Dsma. In case, of no rate cut retracement towards 0.7720 and 0.7770 are highly likely. We expect the RBA to leave its cash rate unchanged at 2% (my personal opinion).

Alternatively, 0.7550 and 0.7450 on the downside expected if rate cut hits the wires.

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