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AUD/USD: Trading the Australian Consumer Price Report

AUD/USD: Trading the Australian Consumer Price Report

2010-07-26 19:12:00
David Song, Currency Strategist
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instructor@dailyfx.com

TTN_10-07-26_body_logo_157x52.png, AUD/USD: Trading the Australian Consumer Price Report

Trading the News

October 1, 2009

DailyFX Research Team

JohnRivera

instructor@dailyfx.com

Currency Analyst

1.212.897.7660

1.888.50.FOREX (36739)

Trading the News: Australia Consumer Prices

Why Is This Event Important:

As price growth in Australia is expected to exceed the central bank’s 2% target for inflation, the data could lead the AUD/USD to extend the rally from the previous week as investors increase speculation for a rate hike in August. However, the Reserve Bank of Australia said it anticipates price growth to hold below 3% this year after keeping the benchmark interest rate unchanged at 4.50% earlier this month, and Governor Glenn Stevens may hold a neutral policy stance over the near-term as he expects the expansion in the global economy to moderate going forward.

What’s Expected:

Time of release: 07/27/2010 1:30 GMT, 21:30 EST

Primary Pair Impact : AUDUSD

Expected: 3.4%

Previous: 2.0%

Will This Be Market Moving (Scenarios):

The headline reading for inflation is forecasted to increase at an annualized pace of 3.4% in the second-quarter, which would be the fastest pace of growth since the last three-months of 2008, and mounting price pressures could lead the RBA to normalize monetary policy further in the second-half of the year as the recovery gathers pace. Indeed, the isle-nation has certainly benefited from the rebound in global trade as China, Australia’s largest trading partner, leads the expansion in the world economy, and the aussie-dollar may continue to retrace from May as price action breaks above the 200-Day SMA (0.8966) for the first time in two-months.

The Upside

As a the labor market improves, with household spending increasing throughout the second-quarter, businesses may pass on higher costs to consumers as growth prospects pick up. Therefore, the rebound in inflation could certainly exceed expectations and spark a bullish reaction in the Australian dollar as investors weigh the outlook for future policy.

The Downside

However, a report by the Melbourne Institute for Economic and Social Research showed consumer inflation expectations fell back to 3.3% in July from 3.4% in the previous month to mark the second consecutive decline, with TD Securities’ gauge for price growth weakening to 3.6% in June from 3.7% in the month prior, and a dismal CPI report could weigh on the exchange rate as investors scale back expectations for a rate hike in August. As a result, the AUD/USD may struggle to hold above the 200-Day SMA as price pressures taper off, and the RBA may see scope to hold a neutral policy stance over the coming months as policy makers talk down the risks for inflation.

How To Trade This Event Risk

Trading the given event risk favors a bullish outlook for the high-yielding currency, and price action following the data could set the stage for a long Australian dollar trade as investors increase expectations for a rate hike. Therefore, if the headline reading for inflation rises to an annualized pace of 3.4% or higher, we will need to see a green, five-minute candle following the release to confirm a buy entry on two-lots of AUD/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

In contrast, uncertainties surrounding the global recovery paired with the drop in consumer inflation expectations may lead businesses to keep a lid on prices, and a dismal CPI report would drag on the exchange rate as investors scale back expectations for a rate hike. As a result, if the annualized rate expands 2.7% or less from the first three-months of the year, we will favor a bearish outlook for the commodity currency, and will implement the same strategy for a short aussie-dollar trade as the long position laid out above, just in reverse.

Price Growth Accelerates -Stronger Than ExpectationsRate Expectations FalterLower Than Expectations

Price pressures taper off, allowing the RBA to maintain a neutral policy stance going forward.

RBA sees scope to normalize monetary policy further as price pressures intensify.

TTN_10-07-26_body_ScreenShot002.png, AUD/USD: Trading the Australian Consumer Price ReportTTN_10-07-26_body_ScreenShot002_1.png, AUD/USD: Trading the Australian Consumer Price Report

Impact Australia Consumer Prices has had over the AUD during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

1Q 2010

04/28/2010 1:30 GMT

2.8%

2.9%

+25

+73

1Q 2010 Australia Consumer Price Index

Consumer prices in Australia increased 0.9% during the first-three months of 2010, with the headline reading for inflation advancing to 2.9% to mark the fastest pace of growth since the fourth-quarter of 2008, and price pressures may intensify over the coming months as the rebound in economic activity gathers pace. The breakdown of the report showed the weighted-median core rate of inflation increased 0.8% during the first-quarter, while the annualized rate advanced 3.1% amid expectations for a 3.0% rise, and the rebound in price growth may lead the central bank to normalize policy further in the second-half of the year in an effort to balance the risks for the real economy. As a result, market participants speculate the RBA to hike the benchmark interest rate by 25bp to 4.50% in May as the region continues to benefit from the expansion in global trade, and the central bank may turn increasingly hawkish going forward as China, Australia’s biggest trading partner, leads the global recovery.

The rally following the higher print for inflation would have led to at least 50 points in profit.

TTN_10-07-26_body_ScreenShot001.png, AUD/USD: Trading the Australian Consumer Price Report

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on AUDUSD ahead of the data release.

Bearish Scenario:If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on AUDUSD ahead of the data release.

TTN_10-07-26_body_AT_bull_1.png, AUD/USD: Trading the Australian Consumer Price ReportTTN_10-07-26_body_AT_bear_1.png, AUD/USD: Trading the Australian Consumer Price Report

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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