The Aussie plunged from US77.64¢ to US76.50¢ after data released on Wednesday and by Thursday morning it had slipped under US76¢.

By Thursday afternoon it had recovered a little to US76.21¢, mostly unaffected by the Bank of Japan's decision to unexpectedly refrain from adding to record stimulus.

Australia saw deflation for the first time in seven years in the first quarter, with the consumer price index contracting 0.2 per cent in the three months to the end of March.

This took the annual rate to 1.3 per cent, compared with 1.7 per cent at the end of December.

More importantly, the core annual rate came in at 1.55 per cent – well below the bottom of the Reserve Bank of Australia's target band of 2 per cent to 3 per cent.

Possible rate cut

The market has now priced in a roughly 50 per cent chance of a Reserve Bank rate cut next week. Such a cut – probably of 0.25 percentage points – would weigh heavily on the Australian dollar.

The current Reserve Bank cash rate is 2 per cent.

"A week ago the Aussie looked on track to spend a bit of time above US80¢ during May," said Westpac currency strategist Sean Callow. "But now I think it's probably more of a US74¢ to US77¢ range for the next two to four weeks."

Mr Callow said he expected the Aussie to be trading at US71¢ at year's end.

Nikko currency strategist Roger Bridges said he expected the Aussie to be trading in the "middle 70s rather than the high 70s" over the rest of the year.

However, he said Wednesday's inflation data had "not really" changed his mind.

"It's very much about commodities and the US dollar," he said. "I think at the end of the year the Aussie will be down to US75¢ but it's very much dependent on what the US dollar will be doing."

Commonwealth Bank currency strategist Joseph Capurso said the bank expected the Aussie to be trading around US78¢ at year's end and would not revise that forecast unless the Reserve Bank cut rates next week.

"We've got a 50/50 chance of a rate cut next week," he said. "If they deliver we might review (the currency).

"Commodity prices have been quite a bit stronger than we thought so that would provide quite a juicy offset to lower Reserve Bank rates."

Softer Aussie

HSBC head of foreign exchange sales, Paul Edwards, said the inflation data would perhaps mean two Reserve Bank rate cuts this year instead of one.

"We were already factoring in a rate cut in the first half of this year," he said.

Over the next month, he said, "we would expect the Aussie dollar to be trading a little bit softer, to US75¢ or under US75¢.

"The house view is that at the end of the year the Aussie dollar will be US70¢."

Managing director of Market Economics, Stephen Koukoulas, said he had definitely changed his mind as a result of the inflation data, tipping an Australian dollar "in the low US70s or perhaps a touch lower".

"I don't think the RBA will actually pull the trigger on a rate cut, but it looks like my long held view that the Reserve Bank would be hiking interest rates in the September and December quarters is redundant.

"With the weight of new news, I am changing my view. It is time to get prudent and look for a short-term pull back after the wonderful Aussie dollar rally."

Economist Paul Dales from Capital Economics said he envisaged a "more modest weakening" for both the Australian and New Zealand dollars.

"Interest rates in both Australia and New Zealand will fall by more than the markets expect," he said.

"When taken together with our forecast that the US Federal Reserve will raise interest rates faster than the markets expect, then this implies that the Australian and New Zealand dollars could still weaken later this year, albeit by less than we previously thought.

" The Australian dollar may weaken fro¢m US76¢ to US70¢ and the New Zealand dollar may fall from US69¢ to US62¢."

Reserve Bank to 'stand pat'

ThinkForex senior markets analyst Matt Simpson was more bullish on the Aussie, tipping the Reserve Bank would leave rates on hold next week.

"Soft inflation saw traders quickly price in a rate cut but I suspect Reserve Bank will stand pat in May.

"This leaves the Australian dollar ... vulnerable to a bounce in May if they do not cut rates.

The Aussie dollar now sits at a technical juncture ... as we have a cluster of support between US74.9¢ and US75.2¢ I expect we'll manage to stay above it on the near term while traders await further data."