Aussie Drops Most Since February as Core Inflation at Record Low

  • Currency slides after climbing 11 percent over three months
  • Pre-emptive May rate cut is a real possibility, Macquarie says

The Australian dollar slid the most in more than two months after the country’s core inflation slowed to the weakest on record, boosting the odds for central bank easing as soon as next month.

The Aussie weakened against all its 16 major counterparts after the statistics bureau said the headline consumer price index fell 0.2 percent from the previous three months, the first negative reading since 2008. Reserve Bank of Australia Governor Glenn Stevens has signaled a reluctance to cut the key interest rate from a record low 2 percent even as he has conceded that there’s scope for lowering it if needed. Swaps traders lifted the odds of a reduction at the May 3 meeting to 47 percent from 15 percent on Tuesday, according to a Credit Suisse Group AG index.

“A pre-emptive May cut is surely now a real possibility,” said Gareth Berry, a foreign-exchange and rates strategist at Macquarie Bank Ltd. in Singapore. “At the latest, an August cut is now inevitable. That spells the end of this three-month-old Australian dollar rebound, and the downtrend can now resume in earnest.”

The Aussie fell 1.7 percent to 76.17 U.S. cents as of 7:22 a.m. in London, set for its biggest drop since Feb. 5. It had climbed almost 11 percent in the three months through Tuesday. Against the yen, the currency dropped 1.9 percent to 84.63.

Disappointing Numbers

The average of two measures of core inflation that the RBA looks at rose 0.15 percent from the final quarter of 2015, undershooting estimates. Trimmed mean CPI gained 1.7 percent from a year earlier, while the weighted median gauge climbed 1.4 percent, both at a record lows. The central bank targets inflation of between 2 percent and 3 percent on average.

“The CPI was a huge surprise to markets,” said Sean Callow, a senior foreign-exchange strategist at Westpac Banking Corp. in Sydney. “It’s a big setback for hedge funds positioned firmly long Aussie.”

The difference in the number of wagers by hedge funds and other large speculators on an advance in the Aussie compared with those on a drop -- so-called net longs -- was 44,106 on April 19, the most since September 2014, according to Commodity Futures Trading Commission data.

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