AUD waits for inflation evidence

The Australian dollar strengthened to around 0.8380 against the US dollar in early trading on Monday before weakening back to 0.8340. The domestic producer prices data was weaker than expected with prices unchanged for the first quarter which cut the annual increase to 2.8%. The correlations are not always strong, but there will be some speculation that the more important consumer inflation data will also be weaker than expected on Tuesday. A low CPI figure would tend to undermine the Australian currency on a downgrading of interest rate expectations.

The overall interest in carry trades will remain a very important short-term factor and any further rise in global equity prices would tend to support the Australian dollar even though the underlying risks are continuing to build.  With further pressure for a correction after recent gains, there is the potential for further tough resistance towards the 0.84 level with the risk of a move back towards 0.82.