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AUD/USD Risks Bearish Break on Slowing Australia CPI- 0.8600 on Tap?

AUD/USD Risks Bearish Break on Slowing Australia CPI- 0.8600 on Tap?

David Song, Shuyang Ren,

- Australia Consumer Price Index (CPI) to Slow From Fastest Pace of Growth Since 2011.

- Core Inflation to Fall Back From Highest Reading Since 2010.

Trading the News: Australia Consumer Price Index (CPI)

A marked slowdown in Australia’s Consumer Price Index (CPI) may spur a bearish break in the AUD/USD as it puts increase pressure on the Reserve Bank of Australia (RBA) to keep the benchmark interest rate on hold for an extended period of time.

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What’s Expected:

AUD/USD CPI

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Why Is This Event Important:

At the same time, it seems as though RBA Governor Glenn Stevens will retain the verbal intervention on the Australian dollar in order to further assist with the rebalancing of the $1T economy, and the AUD/USD remains at risk for a further decline as the central bank head remains in no rush to normalize monetary.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Employment Change (SEP)

15.5K

-29.7K

Retail Sales (MoM) (AUG)

0.4%

0.1%

Wage Price Index (QoQ) (2Q)

0.7%

0.6%

Subdued wage growth paired with the persistent weakness in the labor market may drag on inflation, and a marked slowdown in the CPI may renew bets for additional monetary support amid the weakening outlook for global growth.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

AiG Performance of Construction Index (SEP)

--

59.1

Building Approvals (MoM) (AUG)

1.0%

3.0%

Gross Domestic Product s.a. (QoQ) (2Q)

0.4%

0.5%

However, the ongoing expansion in building activity may generate a stronger-than-expected inflation print, and sticky price pressures may boost interest rate expectations as the central bank continues to see a more meaningful recovery in 2015.

How To Trade This Event Risk(Video)

Bearish AUD Trade: CPI Slows to 2.3% or Lower

  • Need red, five-minute candle following the CPI report for a potential short AUD/USD trade
  • If market reaction favors a bearish aussie trade, short AUD/USD 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 met, set reasonable limit

Bearish AUD Trade: Price Growth Exceeds Market Expectations

  • Need green, five-minute candle to consider a long AUD/USD position
  • Carry out the same setup as the bearish aussie trade, just in the opposite direction

Potential Price Targets For The Release

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AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • As the wedge/triangle formation highlights consolidation phase, will need to see a break in the RSI to generate a near-term bias.
  • Interim Resistance: 0.8845 (23.6% retracement) to 0.8865 (61.8% expansion)
  • Interim Support: 0.8600 pivot to 0.8610 (38.2% expansion)

Read More:

Price & Time: When Does the USD Trend Resume?

EURCAD Hits Target- Long Scalps Eye 1.4457 Resistance

Impact that Australia’s Consumer Price Index (CPI) report has had on AUD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

2Q 2014

07/23/2014 1:30 GMT

3.0%

3.0%

+48

+61

2Q 2014Australia Consumer Price Index (CPI)

AUD/USD Chart

Australia’s 2Q Consumer Price Index (CPI) came in line at an annualized rate of 3.0% after expanding 2.9% during the first three-months of 2014, while the core inflation unexpectedly surged to a 4-year high of 2.9%. Heightening price pressures may continue to dampen bets of seeing the the Reserve Bank of Australia (RBA) further embark on its easing cycle, but it seems as though the central bank is in no rush to normalize monetary policy as the persistent strength in the Australian dollar dampens the outlook for growth and inflation. Nevertheless, the better-than-expected CPI prints spurred a bullish reaction in the Australian dollar, with the AUD/USD climbing above the 0.9400 handle and ending the Asia-Pacific trade at 0.9445.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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