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Australia’s low inflation leaves no room for doubt: the RBA is headed for a rate cut next week. The question is how much? 25 basis points or 50?

AUD/USD is on slide, and could dive towards levels last seen at the beginning of the year.

CPI rose by only 0.1%, much lower than 0.7% that was expected. The strong Australian dollar, together with falling demand, took their toll. This follows no change in prices in Q4 2011.

Trimmed Mean CPI (also known as Core CPI in other countries) rose by only 0.3%, half the early expectations. Australia publishes official inflation figures only once per quarter, making every publication a powerful event.

AUD/USD dropped below the 1.03 line following the release, and dipped under 1.0250 before retracing. Serious support is found at 1.0225, the lows seen earlier in the month.

A dip under this line will send the pair towards levels last seen in January. For more levels and events, see the AUD/USD Forecast.

Earlier in the week, Australian producer prices (PPI) were even softer: they fell by 0.3%, contrary to a rise in the same scale in Q4 2011, and to early expectations that stood on a rise of 0.5%. This is the first fall since Q4 2009.

Australia’s interest rate stands at 4.25%, one of the highest in the Western world. The RBA last cut the rate in December, and was expected to follow through in February, but surprised the markets by leaving it unchanged.

A cut to 4% seems very certain, and a move to 3.75% is also on the cards. Australia’s mining / resources industry is still strong, despite warnings from BHP. However, consumers are buying less, and construction is in a “hangover” mode as  More Australian Home Owners Struggling.

Inflation is no longer a threat in this environment, so Glenn Stevens and his associates are likely to cut the rate and provide some monetary stimulus. The RBA already hinted that a cut is dependent on the CPI, and this results is unambiguous.

While the rate cut is expected by the markets, the actual move will still have an impact, especially if it is a 50bp move.