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THE TAKEAWAY: The Australian Dollar rallied against the U.S. Dollar as the China Consumer Price Index for March came in lower than expected reducing the pressure for tighter monetary policy in China.
Ahead of the Chinese CPI release, the Australian Dollar fell against its American counterpart as the NAB Business Conditions fell from -3 in February to -7 in March. Economists were expected a CPI value of 2.5 per cent for China in March and were disappointed when the actual figure showed 2.1 per cent, down from 3.2 per cent in February.
The Consumer Price Index, which tracks the price change of a basket of consumer goods and services, can affect the way in which central banks direct monetary policy. A CPI that is too high may signal that inflation is rising too fast or that the economy is seen to be growing too quickly. This may encourage Central Banks to reduce spending or make money, ‘tight’. China’s lower than expected CPI in this case could reduce the need for monetary tightening, and may also encourage expansionary spending. With China being Australia’s largest two-way trading partner, more demand for Australia’s commodities could mean increased strength in the so called ‘Aussie Dollar’.
After the large move in the Australian Dollar, the currency started to consolidate gains as focus was shifted back to the apparent deteriorating state of domestic businesses.