Despite a sharp decrease in foreign trade deficit (the data on Australian balance of trade in April were published at 03:30 GMT 2 today), the Australian dollar dropped because of the fall of Japan's stock indices, Australia's biggest trade partner. Japan's Nikkei Stock Average closed down 2.3%, which is a second consecutive downward closure. The yen was bought on the assumption that the Bank of Japan would not take any stimulation measures in the nearest time.
Australian interest rate was dropped to 1.75% at the beginning of May - for the first time since June 2015. The Reserve Bank of Australia downgraded inflation forecasts below 2% in 2016. In first quarter 2016, Australia registered deflation, for the first time since the financial crisis 2008. The slump in iron ore global prices, Australia's main export commodity, puts pressure on AUD as well.
Investors expected the Reserve Bank to decrease interest rates to 1.0% in the nearest future. However, according to the data released earlier this week, Australian GDP grew 3.1% at an annual rate in the first quarter (against a forecast of 2.8% and the previous quarter's value of 2.9%), which has been the strongest growth in the past 4 years. Low inflation may force the RBA to drop interest rates to 1.5% in August, but further stimulation seems hardly possible as the Australian economy grew unexpectedly by 1.1% in the first quarter (against a forecast of 0.8% and the previous quarter's value of 0.7%).
If incoming macroeconomic indicators turn out to be positive, the RBA may postpone a further cut of interest rates and the currency may gain support at troughs of 0.7140 and 0.7200 reached in May. The nearest RBA meeting takes place on 7th June.
Once ECB interest rate decision is announced today, market participants' attention will be switched to tomorrow's statistics on the US labour market (to be released at 14:30 GMT 2). If the statistics are weak, the US dollar will weaken in the whole currency market, including AUD/USD. In the opposite situation, the US dollar will consolidate and AUD/USD will continue to drop. However, a fall below 0.7100 might be difficult.