THE TAKEAWAY: 1Q Australian CPI Rose 0.1% QoQ and 1.6% YoY > Price Increase Fell Short of Analyst Estimates, Sending Traders Scurrying Away from the Aussie Dollar > AUDUSD Dropped

Data released by the Australian Bureau of Statistics showed that the nation’s prices rose 0.1 percent in the first quarter of 2012 and rose 1.6 percent since the same time last year. Today’s numbers surprised traders who were anticipating larger figures. Markets expected the quarterly consumer price index (CPI) to rise 0.6 percent and the annual CPI, 2.2 percent.

Before the release, markets priced in a 94 percent probability that the Reserve Bank of Australia (RBA) would cut its key interest rate by 25 basis points to 4.00 percent. During its April meeting, the RBA noted that monetary policy easing would be possible in the face of moderating inflation, but that it would be “prudent to evaluate [price] data before considering a further policy adjustment.” In light of today’s CPI release and yesterday’s producer price index (PPI) falling short of expectations, an interest rate cut at the next RBA meeting appears very likely.

In the minutes following the release, AUDUSD dropped from 1.0317 to as low as 1.0255.