Poor retail sales data will likely weigh on RBA rate decision tonight

AUD came under pressure this morning following disappointing retail sales data. Data released earlier today showed Australia's Feb retail sales came at 0.0% m/m missing expectations for 0.4% and compared to 0.3% in the previous month. Australian retail sales data disappointed for the third consecutive month and momentum has clearly slowed in the past three months.

Markets largely expect the RBA to leave its key interest rate unchanged at 2% as the Australian economy continued to grow moderately in the first quarter of this year, while the labour market recovery continues. Moreover, the inflation rate increased to 1.7% in Q4 of 2015. The renewed increase in commodity prices also tends to argue against a rate cut.

However, lower than anticipated store purchases could mean reduced economic growth. A decreased flow of capital within the economy as a result of this can impede on RBA's 2 to 3 percent target range for inflation. Australian 2-year government bond yields declined more than 0.8 percent post data release, suggesting that the worse-than-expected figures likely fueled near term RBA rate cut speculation.

"We believe another key rate cut is a bit more likely as the Australian dollar has appreciated considerably since mid-January. The strong Australian currency would put at risk both for the rise of inflation and the economic recovery.  A rate cut that would come as a surprise to most market players would allow the RBA to weaken the AUD significantly." said Commerzbank in a report.