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Weekly Outlook: Aussie Inflation Prepping Another Rate Hike

Saturday, 21 October 2006 00:27:05 GMT  |  John Kicklighter, Currency Analyst

Not performing nearly as well as its commodity currency brethren the New Zealand dollar, the Aussie dollar spent much of last week in its own unimpeded advance.  Since breaking above the tough resistance area around 0.7500 on the prior Thursday and Friday, the AUDUSD pair followed up with another 90-point advance that eventually concluded with a slight retracement from highs to 0.7585. 

Yet to confirm a break of the impressive uptrend, the Aussie major will be left to see if the recent run has brought with it a return to more market moving price action or whether ranges will act as psychological barriers for fading momentum underlying bull and bear trade offs.  A true jumpstart in trend trading will likely depend on surpassing either 0.7500 support or 0.7600 resistance.

The necessary fundamental fuel to force a solid move in the Aussie dollar could definitely be found in the coming week’s calendar.  Quarterly inflation reads are distributed through the week to offer the currency more than one chance to brake its volatility shackles.  The first opportunity to do so comes from Monday’s producer price index.  A government release of quarterly price growth at the producer level, the indicator is heavily favored to show a significant slowdown from July to September.  Economists expected inflation to ease to 0.8 percent growth over the three months, while there is still some debate as to how quickly the annual report will cool.  One thing certainly consistent among most analysts however is that PPI will slow.  In the three months though June, inflation accelerated to 1.6 percent for the quarter and 4.5 percent on the year.  These were both the fastest marks for their respective time frames since 2000.  Since July however energy commodity prices have afforded a very real relief to production bills as crude oil began a figurative dive from its all-time highs through to the close of September. 

While producer prices are likely to get a rise out of the Australian currency, its real value will likely be in formulating better predictions for the Consumer Price Index due later in the week. On Wednesday morning, the Australian Bureau of Statistics will release the eagerly awaited third quarter CPI numbers.  On July 26th, when the previous quarter’s data was printed, the Aussie major preceded to rally over 110 points in a single session.  What’s more, the 4.0 percent level of annual inflation encouraged the central bank to raise overnight lending rates by a quarter point to 6.00 percent.  Though the level of price growth is expected to be lower, the build up surrounding the event may instigate the same degree of movement.  While a number of global indicators, and even the nation’s monthly TD Securities inflation gauge has eased on cheaper energy prices, the average price for the group was actually little change between the second and third quarter.  Furthermore, RBA Governor Glenn Stevens has taken a hawkish stance on regards to inflation, saying “it is still more likely [for the group] to raise rates... to restrain inflation pressures.”  Forecasts currently see the annual CPI read to slip to a 3.7 percent pace for the period, still well above the central bank’s 2 to 3 percent target band.  Currently, futures markets are pricing in an 84 percent chance of another 25 basis point rate hike at the November 8th meeting.  These are high expectations which could make or break the Aussie dollar.

Over the past week, build up to the quarterly inflation reports and November rate hike were nearly as market moving as the actual data offered on the docket.  The first of these indicators was not available to the market until Wednesday.  Westpac’s Leading Economic Index roused only modest interest amongst traders as the dated report was overshadowed by more pressing numbers scheduled for the coming days.  Similarly, the RBA’s foreign exchange transactions for September were garnering little interest from macro traders.  What was interesting for from the transactions figures however was that the month’s A$552 million trade was the second highest figure since the first two months in 2004 when the indicator measured in the billions.   Friday was the most fundamentally relevant day, even though price action fell short of expectations.  Third quarter import prices were expected to plunge 1.0 percent, but dipped 0.3 percent instead.  While this was unfavorable for domestic businesses and consumers, it added another boost to expectations over November’s rate hike.  At the same time, the export price index had also managed to shirk a forecasted 1.0 percent pace of expansion with a 1.9 percent rate instead.  From the breakdown of the product groups, the obvious contributors to the surprise hold were manufactured and crude goods.  Prices of factory goods slowed somewhat from the second quarter, but were still running at 8.5 percent.  Crude materials on the other hand surged by 11.5 percent for the biggest jump since the second quarter of 2005.  With domestic inflation slightly higher than expected and firms receiving more for their products than was initially predicted, a happy medium was found for the economy and currency market that would ultimately pad bets for another rate hike.

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