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Australian Dollar Mildly Strengthens on as-expected PPI

By David Liu
25 July 2011 01:55 GMT

THE TAKEAWAY: Higher producer price growth than previous > RBA may be prompted to raise interest rates > AUD strengthens

The Australian dollar drew moderately higher immediately after second quarter producer price index data showed a moderate growth in prices. The RBA has indicated in the past month that inflation data for the second quarter due this week will greatly affect the bank’s rate policies for the rest of the year.

EVENT

ACT

EXP

PREV

PPI Q2 (QoQ)

0.8%

0.8%

1.2%

PPI Q2 (YoY)

3.4%

3.4%

2.9%

Although the second quarter producer price index, measuring prices received by domestic manufacturers for wholesale goods, met expectations, an increase in the year-over-year reading suggested that costs for Australian goods were still increasing. The PPI is usually correlated with the CPI, as higher prices paid by retailers will be most likely passed onto consumers.

Despite the strong Australian dollar, the highest YoY increase in prices was due to a higher cost of domestic goods. Finished goods rose 3.4% compared to 2.9% in the first quarter, with domestic finished goods increasing 4.6% versus 3.9% the previous quarter. Prices for domestic intermediate materials rose 5.9% in the second quarter against a reading of 4.7% the previous quarter. The increase in domestic prices suggests that a stronger Australian dollar, which largely decreases the costs of imports, may not help slow Australian inflation.

The Australian dollar briefly rose against its American counterpart immediate after the data. Traders are looking for indications of future RBA rate hikes. The central bank has said in the past that second quarter price data will be critical for the future path of rate decisions. Despite July’s RBA meeting minutes suggesting the bank may hold back on further tightening in the near term, the board did indicated the “relaxed” view may change with future price data. Australian dollar traders will be awaiting Consumer Prices slated to be released on July 27th at 0100GMT, with the YoY figure expected at 3.4% versus a previous 3.3%.

DailyFX commentary on RBA July Minutes can be found here.

Australian_Dollar_Mildly_Strengthens_on_As_body_Picture_5.png, Australian Dollar Mildly Strengthens on as-expected PPI

AUDUSD 5 minute chart. Vertical line indicates time of data release. Chart generated with FXCM Strategy Trader.

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25 July 2011 01:55 GMT