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Record-Low Core CPI to Hamper Australian Dollar Recovery

Record-Low Core CPI to Hamper Australian Dollar Recovery

2017-01-24 20:26:00
David Song, Strategist
Share:

- Australia 4Q Consumer Price Index (CPI) to Expand 1.6%- Highest Reading Since 4Q 2015.

- Core Rate of Inflation to Slow to Annualized 1.6%- Slowest Pace Since Series Began in 1983.

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Trading the News: Australia Consumer Price Index (CPI)

A pickup in Australia’s Consumer Price Index (CPI) may fuel the near-term advance in AUDUSD as it puts pressure on the Reserve Bank of Australia (RBA) to move away from its easing-cycle, but a slowdown in the core rate of inflation may drag on the local currency as it sparks bets for additional monetary support.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

It seems as though the RBA remains fairly comfortable with holding the benchmark interest rate at 1.50% for the foreseeable future as the current stance is ‘consistent with sustainable growth in the economy and achieving the inflation target over time,’ but Governor Philip Lowe and Co may keep the door open to further insulate the economy as ‘inflation is expected to remain low for some time.’ In turn, a fresh record-low reading for the core rate of inflation may shake up the near-term outlook for AUD/USD and influence the RBA’s next interest rate decision on February 7 as the disinflationary environment is ‘expected to remain the case for some time.’

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Employment Change (DEC)

10.0K

13.5K

Private Sector Credit (MoM) (NOV)

5.4%

5.4%

Consumer Inflation Expectation (JAN)

--

4.3%

Faster job growth accompanied by the expansion in private-sector credit may prop up consumer prices, and a strong CPI print may trigger a bullish reaction in the Australian dollar as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (NOV)

0.4%

0.2%

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

-0.1%

-0.5%

Wage Price Index (YoY) (3Q)

2.0%

1.9%

Nevertheless, subdued wage growth paired with slowdown in household spending may encourage Australian firms to offer discounted prices, and a dismal development may produce near-term headwinds for the local currency as it fosters speculation for more RBA easing.

For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!

How To Trade This Event Risk(Video)

Bullish AUD Trade: Headline & Core Inflation Pickup in 4Q 2016

  • Need green, five-minute candle following the rate-decision for a long AUD/USD trade.
  • If market reaction favors a bullish aussie position, buy AUD/USD with two separate lots.
  • 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 met, set reasonable limit.

Bearish AUD Trade: Australia CPI Falls Short of Market Expectations

  • Need red, five-minute candle to consider a short aussie position.
  • Carry out the same setup as the bullish AUD trade, just in the opposite direction.

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using Trading View

  • AUD/USD has staged an impressive run, with the pair climbing to a fresh 2017-high of 0.7609 during the last full-week of January, but the failure to close above the Fibonacci overlap around 0.7590 (100% expansion) to 0.7600 (23.6% retracement) highlights the risk for a near-term exhaustion especially as the Relative Strength Index (RSI) struggles to push into overbought territory; may see the downside targets come back into focus, with a move below 0.7530 (38.2% expansion) raising the risk for a move back towards 0.7500 (50% retracement).
  • Interim Resistance: 0.7730 (61.8% retracement) to 0.7770 (61.8% expansion)
  • Interim Support: 0.7150 (161.8% expansion) to 0.7180 (61.8% retracement)

Check out the short-term technical levels that matter for AUD/USD heading into the report!

Impact that theAustralia CPI report has had on AUD/USD during the previous release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

3Q 2016

10/26/2016 00:30 GMT

1.1%

1.3%

+54

+16

3Q 2016 Australia Consumer Price Index (CPI)

AUD/USD 5-Minute Chart

AUD/USD Chart

Australia’s Consumer Price Index (CPI) climbed an annualized 1.3% during the three-months through September after expanding 1.0% during the second-quarter, while the core rate of inflation held steady at 1.7% for the third consecutive quarter. Despite the stronger-than-expected print, the Reserve Bank of Australia (RBA) appears to be in no rush to remove the highly accommodative policy stance as the central bank argues the current stance is ‘consistent with sustainable growth in the economy and achieving the inflation target over time,’ and Governor Philip Lowe may endorse a wait-and-see approach in 2017 as price growth continues to run below target. The Australia dollar popped higher following the inflation report, with AUD/USD taking out the 0.7700, but the market reaction unraveled throughout the day, with the pair closing at 0.7648.

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--- Written by David Song, Currency Analyst

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

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