The Australian dollar continues to sink as bets increase on a rate cut

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The Australian dollar copped a pasting in overnight trade, continuing to slide on the back of Australia’s incredibly weak March quarter CPI report.

Interest rate markets now put the odds of a 25bps rate cut from the RBA next week at over 50%, up from 15% before the CPI report was released, which along with profit-taking continues to drag the Aussie lower.

At the end of Wednesday’s session, the AUD/USD was buying .7583, down a whopping 2.12% for the session. Underlining the severity of the fall, it was the largest percentage decline registered since August last year.

Currently the AUD/USD buys .7596, recovering some ground on the back of the Reserve Bank of New Zealand’s decision to leave interest rates on hold at its April monetary policy decision.

Earlier in the session there was little reaction to the news that the US Federal Reserve left interest rates on hold at the conclusion of its April FOMC meeting. There was also nothing in the accompanying monetary policy statement to drive expectations as to whether or not the Fed will add to its December 2015 rate hike when it next meets in June.

Although there’s little domestic data to rattle the Aussie on Thursday — a start contrast to yesterday — the Bank of Japan’s April monetary policy decision due out this afternoon has the potential to create significant market volatility, including in the Aussie.

“We look for the BOJ to announce an increase in the target for its ‘QQE’ [quantitative and qualitative easing] asset purchases from the current ¥80 trillion annual rate to as much as ¥100 trillion which will likely include increased buying of ETFs (equity derivatives) from the current 3.3 trillion annual rate to as much as ¥7 trillion,” said Ray Attrill, global co-head of FX strategy at the NAB.

“The deposit rate is only likely to be cut further (we expect to -0.2% from -0.1%) in conjunction with a scheme that will effectively allow Japanese banks to get paid to borrow from the BOJ. This is crucial if bank stocks – and with that the broader equity market – is to take a new BoJ easing programme well. In turn, this is crucial to the fate of all things yen.

“If stocks like what they hear today, chances are the yen will weaken.”

While a weaker yen means US dollar strength, something that usually weighs on the Aussie on quiet data days, a positive reaction from Japanese markets will likely buoy the Aussie should it eventuate.

Although there is no set time for the rate decision, it generally arrives just after 1pm AEST.

Here’s the current Australian dollar scoreboard.

  • AUD/USD 0.7596 , 0.0013 , 0.17%
  • AUD/JPY 84.72 , 0.21 , 0.25%
  • AUD/CNH 4.9389 , 0.0081 , 0.16%
  • AUD/EUR 0.6707 , 0.0011 , 0.16%
  • AUD/GBP 0.5224 , 0.0012 , 0.23%
  • AUD/NZD 1.0956 , -0.0125 , -1.13%

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