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AUDUSD Heavily Overbought- Rally to Stall on Slowing Inflation

AUDUSD Heavily Overbought- Rally to Stall on Slowing Inflation

David Song, Strategist

- Australia Consumer Price Index (CPI) to Slow for Second Straight Quarter

- 1.8% Inflation Would Mark the Lowest Reading Since 2Q 2012

Trading the News: Australia Consumer Price Index

A further decline in Australia’s Consumer Price Index may trigger a more meaningful correction in the AUDUSD as the slowing recovery raises the risk of seeing lower borrowing costs in the $1T economy.

What’s Expected:

Time of release: 10/23/2013 0:30 GMT, 20:30 EDT

Primary Pair Impact: AUDUSD

Expected: 1.8%

Previous: 2.4.%

DailyFX Forecast:1.6% to 1.8%

Why Is This Event Important:

Indeed, the Reserve Bank of Australia (RBA) may sounds more dovish at the November 4 meeting should inflation continue to undershoot, and Governor Glenn Stevens may show a greater willingness to implement additional rate cuts in order to further assist with the rebalancing of the real economy.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Employment Change (SEP)

15.0K

9.1K

Westpac Consumer Confidence s.a. (MoM) (OCT)

--

-2.1%

Producer Price Index (YoY) (2Q)

--

1.2%

Easing input prices paired with the persistent slack in the real economy may prompt businesses to conduct heavy discounts as a means to draw increased demands, and a marked slowdown in price growth may halt the AUDUSD rally as it renews bets for additional monetary support.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

NAB Business Confidence (3Q)

--

3

Consumer Inflation Expectation (OCT)

--

2.0%

Retail Sales (MoM) (AUG)

0.3%

0.4%

Nevertheless, we may see an unexpected pickup in the CPI amid the rebound in private sector consumption, and a faster rate of inflation may spur fresh monthly highs in the Australian dollar as it gives the RBA greater scope to move away from its easing cycle.

How To Trade This Event Risk(Video)

Bearish AUD Trade: CPI Narrows to 1.8% or Lower

  • Need red, five-minute candle following the report to consider a bearish Australian dollar trade
  • If market reaction favors a sell trade, short AUDUSD with two separate position
  • Set stop at the near-by swing high/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

Bullish AUD Trade: Inflation Tops Market Expectations

  • Need green, five-minute candle to look at a long AUDUSD trade
  • Implement same setup as the bearish Australian dollar trade, just in opposite direction

Potential Price Targets For The Release

AUDUSD Daily

Forex_AUDUSD_Heavily_Overbought-_Rally_to_Stall_on_Slowing_Inflation_body_Picture_2.png, AUDUSD Heavily Overbought- Rally to Stall on Slowing Inflation

Chart - Created Using FXCM Marketscope 2.0

  • Carving Higher High; Eyes 200-Day SMA (0.9752) for First Time Since April
  • Relative Strength Index Resistance (79) in Focus
  • Interim Resistance: 0.9770 (61.8 expansion) to 0.9800 Pivot
  • Interim Support: 0.9500 (38.2 retracement) to 0.9520 (38.2 expansion)

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)

2Q 2013

07/24/2013 1:30 GMT

2.5%

2.4%

-15

-111

2Q 2013 Australia Consumer Price Index

Forex_AUDUSD_Heavily_Overbought-_Rally_to_Stall_on_Slowing_Inflation_body_ScreenShot275.png, AUDUSD Heavily Overbought- Rally to Stall on Slowing Inflation

Consumer prices grew an annualized 2.4% during the three-months through June following the 2.5% advance in the first quarter, while the core rate of inflation crossed the wires at 2.2% versus expectations for a 2.1% print. Despite the choppy market reaction immediately following the release, the Australian dollar struggled to hold its ground following the CPI report, with the AUDUSD slipping below the 0.9250 region, and the higher-yielding currency weakened further throughout the day as the pair closed at 0.9165.

--- Written by David Song, Currency Analyst

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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