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AUD/USD Rebound Vulnerable to Slowing Australia Core CPI

AUD/USD Rebound Vulnerable to Slowing Australia Core CPI

David Song, Shuyang Ren,

- Australia Consumer Price Index (CPI) to Pick Up for First Time Since 2Q 2014.

- Core Rate of Inflation to Narrow to Annualized 2.1%- Slowest Pace of Growth Since 2Q 2012.

For more updates, sign up for David's e-mail distribution list.

Trading the News: Australia Consumer Price Index (CPI)

An expansion in Australia’s Consumer Price Index (CPI) may generate a near-term rebound in AUD/USD as it provides the Reserve Bank of Australia (RBA) with greater scope to retain its current policy throughout 2015.

What’s Expected:

AUD/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

The RBA may continue to endorse a wait-and-see approach as inflation expectations remain largely anchored, but a meaningful slowdown in the core CPI may fuel bets for lower borrowing-costs as Governor Glenn Stevens warns of below-average growth over the policy horizon.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

NAB Business Confidence (JUN)

--

10

Gross Domestic Product s.a. (QoQ) (1Q)

0.7%

0.9%

Company Operating Profit (QoQ) (1Q)

0.0%

0.2%

Improved confidence paired with the pickup in economic activity may boost consumer price growth, and a strong inflation print may heighten the appeal of the aussie as it dampens expectations for lower borrowing-costs in the $1T economy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

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

--

-3.2%

Retail Sales (MoM) (MAY)

0.5%

0.3%

Trade Balance (MAY)

-2225M

-2751M

However, waning demand from home and abroad may encourage Australian firms to offer discounted prices, and a marked slowdown in the core rate of inflation may put increased pressure on the RBA to further embark on its easing cycle to encourage a stronger recovery.

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How To Trade This Event Risk(Video)

Bullish AUD Trade: Australia CPI Highlights Sticky Price Growth

  • Need to see green, five-minute candle following the print to consider a long trade on AUD/USD.
  • If market reaction favors a bullish aussie trade, buy AUD/USD 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 entry on remaining position once initial target is hit; set reasonable limit.

Bearish AUD Trade: Inflation Report Falls Short of Market Expectations

  • Need red, five-minute candle to favor a short AUD/USD trade.
  • Implement same setup as the bullish aussie trade, just in reverse.

Potential Price Targets For The Release

AUDUSD Daily

AUD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Long-term outlook for AUD/USD remains bearish as price & RSI retain the downward trend from earlier this year; favor approach to sell-bounces in AUD/USD especially as the RBA retains the verbal intervention on the aussie.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long AUD/USD since May 15, while the ratio continues to come off of extremes as it narrows to +1.76, with 64% of traders now long.
  • Interim Resistance: 0.7570 (50% expansion) to 0.7590 (100% expansion)
  • Interim Support: 0.7240 (100% expansion) 0.7268 (Jan. 2009 high)

Read More:

GBP/USD Stuck in Wedge/Triangle- Retail FX Remains Long Ahead of BoE

COT-52 Week Positioning Extremes in CAD and MXN

Impact that the Australia CPI report has had on AUD/USD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

1Q

2015

04/21/2015

01:30 GMT

1.3%

1.3%

+51

+59

1Q 2015 Australia Consumer Price Index

AUD/USD Chart

As expected, Australia’s Consumer Price Index (CPI) narrowed further in the first quarter of 2015, with the headline reading slowing to an annual rate of 1.3% from 1.7% during the last three-months of 2014. However, the core rate of inflation unexpectedly climbed to 2.3% from 2.2% during the same period. Sticky price growth may encourage the Reserve Bank of Australia (RBA) to retain a wait-and-see approach throughout 2015, but Governor Glenn Stevens may continue to jawbone the local currency in an effort to further assist with the rebalancing of the real economy. The Australian dollar strengthened throughout the Asia/Pacific trade following the sticky inflation prints, with AUD/USD climbing above the 0.7750 region to end the session at 0.7776.

--- Written by David Song, Currency Analyst and Shuyang Ren

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

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