The Australian dollar has plunged by more than three-quarters of a cent, slipping below US93¢ to its lowest level in two weeks amid softer-than-expected inflation figures and as Chinese manufacturing activity slowed for the fourth-straight month.
The local currency, which had strengthened on Wednesday morning ahead of the two key data reports, was trading at US93.77¢ when it fell to US92.96¢ after the back-to-back releases. It weakened further and was fetching US92.84¢ in late trade.
While the annual rate of growth for headline inflation pushed to 2.9 per cent for the first-quarter of this year, it was lower than analysts’ forecasts of 3.2 per cent.
Underlying inflation was also lower than consensus forecasts, with the trimmed mean measures coming in at 0.5 per cent for the three months to take the annual rate to 2.6 per cent. The annual growth rate is in the middle of the Reserve Bank’s target band of 2 to 3 per cent.
“The sharp downside surprise on the core inflation readings sparked a quick sell-off to around US93.20¢,” noted Westpac’s currency strategists Robert Rennie and Sean Callow.
“The attempt to hold this support level only lasted until the China PMI data, which saw another round of AUD selling to US93¢ despite meeting consensus on the headline reading.”
The HSBC/Markit flash Purchasing Managers Index (PMI), which measures China’s factory activity, rose to 48.3 points in April from 48 points in March. But the reading remained below 50, which indicates a slowdown in activity.
Mr Rennie and Mr Callow said the Australian dollar was already due for a correction, and the new data “arguably increases the arguments for a continuation of this correction”.
They added that if the local unit “closes” below US92.80¢/US93¢, there could be a further downward move towards US91.90¢/US92.10¢.
The strategists said stronger US data and weaker Chinese figures would be needed to force further falls from those levels.
The Reserve Bank of Australia had tempered its rhetoric on the need for a weaker exchange rate after the surprise jump in four-quarter consumer price index (CPI) last year sparked fears of a faster-than-expected impact of a falling currency on imported inflation.
A softer-than-forecast reading has therefore given the central bank some breathing room and left it open to keep the cash rate on hold for some time.
The central bank might also resume its “jawboning” on the need for a lower exchange rate even as there are signs some non-mining sectors of the economy are improving. This could take place if the currency does not fall to around US91¢ by the middle of the year, Westpac senior economist Justin Smirk said.
The recent elevated levels of the Australian dollar have seen more strategists revised their forecasts. Credit Suisse and TD Securities analysts have joined the Commonwealth Bank in lifting their forecasts for the currency over the next few months to above US90¢.
