AUDJPY: Why this is a crucial week for AUD

The Australian dollar has started the week on a good note after the People’s Bank of China (PBoC) decision to cut capital requirements for commercial banks. The commodity-backed aussie popped higher at the open in response to the news, but AUDUSD couldn’t break an important short-term resistance zone around 0.7840. The commodity currency is preparing for a massive week of economic events amidst heightened levels of volatility and uncertainty about the future of interest rates in Australia.

Australia’s all-important inflation numbers

The biggest event for the aussie is the release of Australia inflation numbers for last quarter, which could dictate the path of monetary in Australia in the near-term. The market is expecting consumer prices to have risen an un-impressive 0.1% in Q1 after rising 0.2% in Q4, bringing headline year-on-year inflation to a measly 1.3%. Core-CPI is expected to increase an encouraging 0.5-0.6% q/q and 2.2-2.3% y/y. This places the RBA’s favourite metric for inflation firmly in the bottom half of its 2-3% target range for inflation, which would leave the door open for further monetary policy loosening if the bank deems it necessary to support the economy but it definitely wouldn’t guarantee an interest rate cut next month. In saying that, a softer than expected core figure – around 2% - would greatly increase the RBA’s imputes to loosen monetary policy, diminishing the aussie’s attractiveness from a yield perspective.

The RBA’s shock decision will be put under a microscope

The other big domestic event for the Australian dollar is the release of the RBA’s minutes from its policy meeting earlier this month. At the meeting the bank defied market expectations by leaving the official cash rate on hold at 2.25%. The bank noted that it was appropriate to leave rates unchanged at present, but further easing may be needed over the period ahead. The release of strong labour market data last week has pushed back the market’s expectations for further rate cuts, with the market now pricing in a 50/50 chance of a 25 basis point cut in May, but we still expect the RBA to retain its dovish bias. It’s worth noting that RBA governor Stevens is due to speak in New York at around 0300AEST tomorrow (he’s speaking at an Australian American luncheon at GS).

China’s PMI data

Looking offshore, aussie traders should keep a close eye on private sector manufacturing data out of China on Thursday (1140AEST). HSBC is due to release its flash manufacturing PMI for April, which is expected to show a slight deterioration of sentiment within the heart of China’s economy (exp. 49.4, prior 49.6). On the back of a slowdown in growth last quarter and some disappointing economic data recently, the momentum of the manufacturing sector takes on special significance.

AUDJPY

The latest rally in the Australian dollar has sent AUDJPY to the top of its trading range, but it may be heading lower from here. There is strong bearish divergence between price and RSI on a four-hour chart which indicates that momentum may have shifted to the downside for the time being. If this is the case it may make a run for the base of its trading channel (see chart), although the slew of economic events this week may dictate the pair’s movements.