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FOREX: Australian Dollar Rally May Fail on Fleeting Rate Hike Bets

By , Currency Strategist
27 July 2011 07:11 GMT

Talking Points

  • Aussie Soars as Inflation Data Stokes Rates Bet but Rally May Prove Fleeting
  • NZ Dollar Gains on Business Confidence Data Ahead of RBNZ Announcement
  • German CPI May Go Unnoticed as Traders Resign to Standstill at the ECB

The Australian Dollar outperformed in overnight trade as unexpectedly strong inflation figures stoked the outlook for interest rates. Second-quarter Consumer Price Index figures put the annual rate of price growth at 3.6 percent, topping forecasts calling for a print at 3.4 percent and marking the highest reading in 2.5 years. A Credit Suisse gauge of traders’ priced-in monetary policy outlook rose following the outcome, now showing the Reserve Bank of Australia is likely to keep interest rates on hold over the coming 12 months versus expectation of a least one cut established over the past two weeks.

The reaction from price action seems a bit overstated however considering RBA Governor Glenn Stevens explicitly noted in the statement accompanying July’s rate decision that while “inflation is likely to remain elevated in the near term due to the extreme weather events earlier in the year,” it is likely to return close to the target level as “temporary price shocks dissipate”. On balance, this suggests that the pick-up in price growth evidenced in today’s report had been foreseen (at least in trend terms) by the central bank even as it chose to leave borrowing costs unchanged for the seventh consecutive month, hinting bullish momentum may prove fleeting as markets move toward a more sober evaluation of today’s events.

The New Zealand Dollar was likewise well-supported, rising as much as 0.5 percent against its leading counterparts after an NBNZ gauge of Business Confidence rose for the fourth straight month to the highest level in 14 months. Notable improvements were recorded across most key elements of the survey, with a larger percentage of firms expecting a pickup in overall economic activity, profits and employment. Perhaps most interestingly, companies’ export outlook improved for the third consecutive month despite the currency’s aggressive appreciation over recent months. The release underscored expectations of a hawkish shift in central bank rhetoric ahead of tomorrow’s RBNZ monetary policy announcement, with the Kiwi now basking in the luxury of being attached to the most robust one-year rate hike outlook in the G10.

The preliminary set of July’s German Consumer Price Index figures headlines the calendar in European hours, with consensus estimates calling for the annual inflation rate to remain steady at 2.3 percent. The outcome is likely to pass with little fanfare considering the markets already price in no further tightening from the European Central Bank at least until the second half of next year as EU officials’ commitment stiff austerity measures over at last week’s summit in Brussels to bring budget deficits below 3 percent by 2013 weighs on economic growth.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

1:00

NZD

NBNZ Activity Outlook (JUL)

43.7

-

38.7

1:00

NZD

NBNZ Business Confidence (JUL)

47.6

-

46.5

1:30

AUD

Consumer Prices Index (QoQ) (2Q)

0.9%

0.7%

1.6%

1:30

AUD

Consumer Prices Index (YoY) (2Q)

3.6%

3.4%

3.3%

1:30

AUD

RBA Trimmed Mean (QoQ) (2Q)

0.9%

0.7%

0.9%

1:30

AUD

RBA Trimmed Mean (YoY) (2Q)

2.7%

2.5%

2.3%

1:30

AUD

RBA Weighted Median (QoQ) (2Q)

0.9%

0.7%

0.8%

1:30

AUD

RBA Weighted Median (YoY) (2Q)

2.7%

2.5%

2.2%

2:00

CNY

Industrial Profits YTD (YoY) (JUN)

28.7%

-

27.9%

Euro Session: What to Expect

GMT

CCY

EXP

PREV

IMPACT

-

EUR

German Consumer Price Index (YoY) (JUL P)

2.3%

2.3%

High

-

EUR

German Consumer Price Index (MoM) (JUL P)

0.3%

0.1%

Medium

-

EUR

German CPI - EU Harmonised (YoY) (JUL P)

2.4%

2.4%

High

-

EUR

German CPI - EU Harmonised (MoM) (JUL P)

0.3%

0.0%

Medium

6:00

EUR

German Import Price Index (YoY) (JUN)

7.0%

8.1%

Low

6:00

EUR

German Import Price Index (MoM) (JUN)

-0.2%

-0.6%

Low

8:00

EUR

Euro-Zone M3 s.a. (3M) (JUN)

2.3%

2.2%

Low

8:00

EUR

Euro-Zone M3 s.a. (YoY) (JUN)

2.3%

2.4%

Low

8:00

EUR

Italian Business Confidence (JUL)

99.7

100.5

Low

9:30

CHF

KOF Swiss Leading Indicator (JUL)

2.11

2.23

Medium

10:00

GBP

CBI Business Optimism (JUL)

10

9

Low

10:00

GBP

CBI Trends Total Orders (JUL)

-3

1

Low

10:00

GBP

CBI Trends Selling Prices (JUL)

27

27

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.4404

1.4572

GBPUSD

1.6304

1.6467

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27 July 2011 07:11 GMT