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AUDUSD: Trading Australia’s Consumer Price Report

By , Currency Analyst
23 April 2012 20:00 GMT

Trading the News: Australia Consumer Price Index

What’s Expected:

Time of release: 04/24/2012 1:30 GMT, 21:30 EDT

Primary Pair Impact: AUDUSD

Expected: 2.2%

Previous: 3.1%

DailyFX Forecast: 2.0% to 2.2%

Why Is This Event Important:

Consumer prices in Australia are expected to increase 2.2% in the first quarter after expanding 3.1% during the last three-months of 2011, and the slower rate of inflation could spark a sharp selloff in the AUDUSD as it heightens speculation for a rate cut. As the Reserve Bank of Australia maintains a cautious outlook for the $1T economy, a soft inflation report would certainly increase the central bank’s scope to combat the slowing recovery, and we may see the RBA carry out its easing cycle throughout 2012 in an effort to balance the risks surrounding the region. According to Credit Suisse overnight index swaps, market participants are pricing nearly 100bps worth of rate cuts over the next 12-months, and the downturn in interest rate expectations reinforce a bearish outlook for the AUDUSD as it carves out a major top in 2012.

Recent Economic Developments

The Upside

Release

Expected

Actual

Employment Change (MAR)

6.5K

44.0K

Unemployment Rate (MAR)

5.3%

5.2%

Consumer Inflation Expectation (APR)

--

3.3%

The Downside

Release

Expected

Actual

Producer Price Index (YoY) (1Q)

2.2%

1.4%

Export Price Index (QoQ) (1Q)

-3.0%

-7.0%

Import Price Index (QoQ) (1Q)

-0.1%

-1.2%

The jump in employment paired with the rise in inflation expectations could generate an above-forecast CPI print, and a stronger rate of price growth may lead the AUDUSD to retrace the decline from the previous month as it dampens speculation for lower borrowing costs. However, easing input price pressures should help to alleviate the upside risk for inflation, and we may see the RBA lower the benchmark interest rate further in an effort to encourage a sustainable recovery. In turn, a soft CPI recovery may lead the AUDUSD to give back the rebound from earlier this month, and we may see the pair threaten interim support around 1.0200 as market participants increase bets for a rate cut at the next meeting on May 1.

Potential Price Targets For The Release

AUDUSD_Trading_Australias_Consumer_Price_Report_body_ScreenShot072.png, AUDUSD: Trading Australia’s Consumer Price Report

How To Trade This Event Risk

Forecasts for a slower rate of inflation certainly casts a bearish outlook for the high-yielding currency, but an above-forecast print could set the stage for a long Australian dollar trade as it dampens expectations for a rate cut. Therefore, if the CPI tops 2.2%, we will need to see a green, five-minute candle following the report to generate a buy entry on two-lots of AUDUSD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches is mark in order to protect our profits.

In contrast, easing price pressures paired with the protracted recovery certainly dampens the outlook for consumer prices, and a marked slowdown in the headline reading for inflation could spark a sharp selloff in the exchange rate as market participants look for another rate cut. As a result, if the CPI misses expectations, we will implement the same strategy for a short aussie-dollar trade as the long position mentioned above, just in the opposite direction.

Impact that the Australian Consumer Price report has had on AUD during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

4Q 2011

1/25/2012 0:30 GMT

3.3%

3.1%

+36

+128

4Q 2011 Australian Consumer Price Index

AUDUSD_Trading_Australias_Consumer_Price_Report_body_ScreenShot071.png, AUDUSD: Trading Australia’s Consumer Price Report

Although the headline reading for inflation fell short of market expectations, the stickiness in the core consumer price index sparked a rally in the Australian dollar as the figure unexpectedly advance to 2.6% from 2.4%. Indeed, the uptick in underlying inflation pushed the AUDUSD back above 1.0500, and the high-yielding currency continued to gain ground throughout the day to close at 1.0596.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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23 April 2012 20:00 GMT