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Australian Dollar to Search for Lower Low on Weak 4Q CPI

Australian Dollar to Search for Lower Low on Weak 4Q CPI

2014-01-21 20:40:00
David Song, Gregory Marks,

- Australia Consumer Price Index (CPI) to Rise for First Time Since 10 2013

- Core Inflation to Hold at 2.3% for Six Straight Quarters

Trading the News: Australia Consumer Price Index

A pick up in Australia’s Consumer Price Index may foster a more meaningful correction in the AUDUSD as the Reserve Bank of Australia (RBA) endorses a wait-and-see approach for monetary policy.

What’s Expected:

Time of release: 01/22/2014 0:30 GMT, 19:30 EST

Primary Pair Impact: AUDUSD

Expected: 2.4%

Previous: 2.2.%

DailyFX Forecast: 2.3% to 2.4%

Why Is This Event Important:

Indeed, RBA Governor Glenn Stevens may further scale back his dovish tone for the $1T economy as stronger inflation heightens the threat of an asset-bubble, and the central bank may retain its current policy throughout 2014 as the previous rate cuts continue to work their way through the real economy.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Retail Sales(MoM) (NOV)

0.4%

0.7%

Consumer Inflation Expectation (OCT)

--

2.1%

Producer Price Index (YoY) (3Q)

--

1.9%

Australian firms may hike consumer prices amid higher input costs along with the rise in private sector consumption, and a larger-than-expected rise in the CPI may spark a more meaningful rebound in the AUDUSD as market participants scale back bets for another rate cut.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Employment Change (DEC)

10.0K

-22.6K

Westpac Consumer Confidence s.a. (DEC)

--

-4.8%

Gross Domestic Product s.a. (QoQ) (3Q)

0.7%

0.6%

Nevertheless, the ongoing weakness in the real economy paired with the risk of a slower recovery may continue to drag on price growth, and a dismal inflation print may ultimately pave the way for fresh lows in the Australian dollar as it raises the RBA’s scope to further embark on its easing cycle.

How To Trade This Event Risk(Video)

Bullish AUD Trade: CPI Climbs to 2.4% or Higher

  • Need green, five-minute candle following the report to consider a bullish Australian dollar trade
  • If market reaction favors a long trade, buy AUDUSD with two separate position
  • Set stop at the near-by swing low/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

Bearish AUD Trade: Inflation Falls Short of Market Forecast

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

Potential Price Targets For The Release

AUDUSD Daily

Forex_Australian_Dollar_to_Search_for_Lower_Low_on_Weak_4Q_CPI_body_Picture_2.png, Australian Dollar to Search for Lower Low on Weak 4Q CPI

Chart - Created Using FXCM Marketscope 2.0

  • Looking for Lower Low Following Lower High (0.9085)
  • Relative Strength Index Resistance Fails to Maintain Bullish Trend
  • Interim Resistance: 0.8980 (38.2 expansion) to 0.9000 (1.618 expansion)
  • Interim Support: 0.8670 (100.0 expansion) to 0.8700 (78.6 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)

3Q 2013

10/22/2013 01:30 GMT

1.8%

2.2%

+32

-83

3Q 2013 Australia Consumer Price Index

Forex_Australian_Dollar_to_Search_for_Lower_Low_on_Weak_4Q_CPI_body_Picture_1.png, Australian Dollar to Search for Lower Low on Weak 4Q CPI

Inflation data out of Australia came in better than expected for the third quarter and supported the Australian Dollar early in the trading day. An initial spike from the data sent AUD/USD to four month highs, but the pair failed to break June highs and could not open or close above the 50% retracement extending from what was then the high and low of 2013. Spikes in Chinese inter-bank lending rates soon thereafter once again put pressure on the Aussi and moves to the downside have continued since. After a massive miss on employment figures last week, the Australian Dollar would need another beat like last quarter in order for any support to be found fundamentally. On the flip side, a disappointing reading would give the RBA more room to hint at further rate cuts in light of weak data as of late.

--- 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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