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Upbeat Australia 1Q Consumer Price Index (CPI) to Curb AUD/USD Losses

Upbeat Australia 1Q Consumer Price Index (CPI) to Curb AUD/USD Losses

2017-04-25 19:30:00
David Song, Currency Strategist
Share:

- Australia CPI to Climb Annualized 2.2%- Fastest Pace of Growth Since 3Q 2014.

- Core Inflation to Rebound from 1.6%- Lowest Reading Since the Series Began in 1983.

Trading the News: Australia Consumer Price Index (CPI)

DailyFX Calendar

A material pickup in Australia’s headline and core Consumer Price Index (CPI) may alter the monetary policy outlook and heighten the appeal of the aussie should the data prints put pressure on the Reserve Bank of Australia (RBA) to start normalizing monetary policy.

Why Is This Event Important:

Signs of heightening price pressures may push the RBA to change its tune over the coming months, and the central bank may show a greater willingness to move away from its easing-cycle as inflation approaches the 2% to 3% target band. However, the RBA may continue to endorse a wait-and-see approach at the April 4 meeting as the central bank warns ‘global inflation had increased, driven by the rise in oil prices over 2016,’ and Governor Philip Lowe and Co. may retain the record-low cash rate throughout 2017 as ‘wage growth and broader measures of labour cost pressures remained subdued.’

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Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Employment Change (MAR)

20.0K

60.9K

Participation Rate (MAR)

64.6%

64.8%

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

--

0.1%

Improved confidence accompanied by the ongoing expansion in Australia’s labor market may generate a stronger-than-expected CPI print, and a positive development may prop up AUD/USD as it encourages the RBA to normalize monetary policy sooner rather than later.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Home Loans (MoM) (FEB)

0.0%

-0.5%

Retail Sales (MoM) (FEB)

0.3%

-0.1%

Private Sector Credit (YoY) (FEB)

5.3%

5.0%

However, Australian firms may offer discounted prices amid the slowdown in private-sector consumption, and another below-forecast reading may spur a bearish reaction in the aussie as it drags on interest-rate expectations.

How To Trade This Event Risk(Video)

Bullish AUD Trade: Headline & Core Inflation Picks Up in 1Q 2017

  • Need a green, five-minute candle following the CPI report to consider 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 Report Continues to Disappoint

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

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using Trading View

  • Broader outlook for AUD/USD remains relatively flat as the pair preserves the range from 2016, but the pair may continue to give back the advance from earlier this year following the failed attempt to test the December high (0.7778); the Relative Strength Index (RSI) also highlights a similar dynamic and keeps the near-term bias tilted to the downside as it preserves the bearish formation carried over from February, with the first downside area of interest coming in around 0.7500 (50% retracement) followed by 0.7450 (38.2% 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)

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Impact that Australia 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)

4Q

2016

01/25/2017 0:30 GMT

1.6%

1.5%

-45

-20

4Q 2016 Australia Consumer Price Index (CPI)

AUD/USD 10-Minute

AUD/USD Chart

Australia’s Consumer Price Index (CPI) climbed an annualized 1.5% during the last three-months of 2016 after expanding 1.3% in the third-quarter, while the core rate of inflation narrowed to 1.6% from 1.7% during the same period. The softer-than-expected CPI report may encourage the Reserve Bank of Australia (RBA) to keep the official cash rate at the record-low throughout 2017 as the central bank warns ‘the rise in underlying inflation is expected to be a bit more gradual with growth in labour costs remaining subdued.’ The Australian dollar struggled to hold its ground following the release, but the market reaction was short-lived, with AUD/USD regaining its footing during the day to close at 0.7571.

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

--- Written by David Song, Currency Analyst

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

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