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Bullish AUD/USD Momentum Wanes Ahead of 1Q CPI- Lower High in Place?

By , Currency Analyst  and Gregory Marks
22 April 2014 21:00 GMT

Bullish AUD/USD wanes ahead of 1q CPI

- Australia Headline & Core Consumer Price Index (CPI) to Rise for Second Straight Quarter.

- Headline Inflation to Exceed RBA’s 3% Limit for First Time Since 3Q 2011.

Trading the News: Australia Consumer Price Index

A further pick up in Australia’s Consumer Price Index may foster a near-term rally in the AUD/USD as it puts increased pressure on the Reserve Bank of Australia (RBA) to normalize monetary sooner rather than later.

What’s Expected:

AUD/USD CPI

Why Is This Event Important:

Indeed, RBA Governor Glenn Stevens may adopt a more hawkish tone for monetary policy as price growth exceeds the central bank’s 2-3% target band, and the board may show a greater willingness to raise the benchmark interest rate ahead of schedule in an effort to achieve its mandate for price stability.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Employment Change (MAR)

2.5K

18.1K

Consumer Inflation Expectation (APR)

--

2.4%

Private Sector Credit (MoM) (FEB)

0.4%

0.4%

The ongoing expansion in private sector lending along with the pickup in employment may generate a stronger-than-expected inflation report, and a marked rise in consumer prices may generate fresh monthly highs in the AUD/USD as it heightens interest rate expectations for the $1T economy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

NAB Business Confidence (1Q)

--

6

New Motor Vehicle Sales (MoM) (MAR)

--

-0.3%

Retail Sales (MoM) (FEB)

0.3%

0.2%

Nevertheless, the inflation report may fall short of market expectations amid the decline in business confidence paired with the slowdown in household consumption, and an weaker-than-expected CPI reading may pave the way for a near-term reversal in the AUD/USD as it raises the RBA’s scope to further embark on its easing cycle.

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How To Trade This Event Risk(Video)

Bullish AUD Trade: CPI Climbs 3.2 % or Higher

  • Need green, five-minute candle following the report to consider a bullish Australian dollar trade
  • If market reaction favors a long trade, buy AUD/USD with two separate positions
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to breakeven on remaining position once initial target is hit, set reasonable limit

Bearish AUD Trade: Headline & Core Inflation Fall Short of Market Forecast

  • Need red, five-minute candle to look at a short AUD/USD position
  • Implement same setup as the bearish Australian dollar trade, just in opposite direction

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Appears to Be Searching for Higher Low After Marking Higher High at 0.9460
  • Bullish Outlook at Risk as Relative Strength Index Fails to Maintain Upward Trend
  • Interim Resistance: 0.9460-70 (23.6% expansion)
  • Interim Support: 0.9200 (100.0% expansion) to 0.9220 (61.8% retracement)

Impact that Australia CPI 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 2013

01/22/2013 0:30 GMT

2.4%

2.7%

+68

+46

4Q 2013 Australia Consumer Price Index

aud cpi table

Inflation data for the fourth quarter came in above market participants expected and sent the Aussie higher by over 60 pips at the print. This higher inflation puts the Reserve Bank of Australia in a difficult position, much like the RBNZ. Although data has been softening over the past year and there are certainly headwinds for the Australian economy moving forward, the RBA is likely delaying any rate increases for as long as possible. We may see the central bank take measures similar to the RBNZ in order to cool their housing market on the back of Chinese buying of properties in major cities. Any print that comes in below expectations this time around may help the USDollar regain some strength against the Aussie.

--- Written by David Song, Currency Analyst and Gregory Marks, FXCM Analysts

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

To be added to David's e-mail distribution list, please follow this link.

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22 April 2014 21:00 GMT