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Australian Dollar Falls on Fading Rate Hike Outlook as CPI Disappoints

Australian Dollar Falls on Fading Rate Hike Outlook as CPI Disappoints

2010-07-28 04:28:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

  • Australian Dollar Crumbles as Consumer Prices Disappoint
  • New Zealand Business Confidence Drops on RBNZ Rate Hike

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2949

1.3043

GBPUSD

1.5479

1.5636

The Euro was little changed in overnight trade while the British Pound inched slightly lower, down 0.1 percent against the US Dollar. We remain flat EURUSD and GBPUSD.

Asia Session Highlights

CCY

GMT

EVENT

ACT

EXP

PREV

AUD

1:30

RBA Weighted Median (YoY) (2Q)

2.7%

3.0%

3.1%

AUD

1:30

RBA Weighted Median (QoQ) (2Q)

0.5%

0.8%

0.8%

AUD

1:30

RBA Trimmed Mean (YoY) (2Q)

2.7%

3.0%

3.0%

AUD

1:30

RBA Trimmed Mean (QoQ) (2Q)

0.5%

0.8%

0.8%

AUD

1:30

Consumer Price Index (YoY) (2Q)

3.1%

3.4%

2.9%

AUD

1:30

Consumer Price Index (QoQ) (2Q)

0.6%

1.0%

0.9%

JPY

2:00

Bank of Japan’s Kamezaki Speaks in Sapporo City

-

-

-

NZD

3:00

NBNZ Business Confidence (JUL)

27.9

-

40.2

NZD

3:00

NBNZ Activity Outlook (JUL)

32.4

-

38.5

JPY

5:00

Small Business Confidence (JUL)

-

47.4

The Australian Dollar shot lower after Consumer Price Index figures disappointed in the second quarter, crushing interest rate hike expectations. Prices rose 0.6 percent in the three months through June, putting the annual inflation rate at 3.1 percent. Economists were expecting a print at 3.4 percent ahead of the release. A Credit Suisse gauge of priced-in monetary policy expectations dropped 15 basis points from yesterday, erasing bets on another rate hike at least over the next 12 months. The Aussie dropped over 1 percent against its US counterpart, losing its grip on the 0.90 figure.

New Zealand Business Confidence dropped the most since October 2008 in July according to a report from the National Bank of New Zealand (NBNZ), with only 27.9 percent of the firms polled for the survey expecting business conditions to improve from here, the lowest level in a year. The outcome may owe to higher borrowing costs and an appreciation of the currency – a hefty burden on New Zealand’s export-centric economy – following the first interest rate hike in three years last month. The central bank is widely expected to add another 25bps to benchmark borrowing costs at tomorrow’s monetary policy meeting.

Euro Session: What to Expect

CCY

GMT

EVENT

EXP

PREV

IMPACT

EUR

-

German Consumer Price Index (MoM) (JUL P)

0.3%

0.1%

Medium

EUR

-

German Consumer Price Index (YoY) (JUL P)

1.2%

0.9%

High

EUR

-

German Consumer Price Index - EU Harmon. (MoM) (JUL P)

0.2%

0.0%

Medium

EUR

-

German Consumer Price Index - EU Harmon. (YoY) (JUL P)

1.1%

0.8%

Medium

EUR

8:00

European Central Bank Publishes Bank Lending Survey

-

-

Low

Germany’s Consumer Price Index is expected to add 0.3 percent in July, putting the annual inflation rate at 1.2 percent, reversing the drop to 0.9 percent in June. On balance, the outcome may not prove especially market-moving considering its limited implications for monetary policy. Indeed, price growth remains comfortably below the central bank’s 2 percent target level and monetary conditions have actually turned more restrictive in recent weeks, meaning Jean-Claude Trichet and company are surely in no hurry tighten.

Although the money supply expanded for the first time in eight months in June, that outcome did not take into account July’s expiry of the ECB’s 12-month repo – a lending facility allowing European banks to secure access to the central bank’s funds for a year – which amounted to large liquidity drain and put upward pressure on short-term borrowing costs. Indeed, European 2-year yields overtook those of the US for the first time in three months at the beginning of this month and now trade at a 25bps premium, meaning Euro Zone monetary conditions are at their most restrictive since mid-February.

With borrowing costs set to push higher still as governments issue debt to finance their gaping deficits and economic growth likely to slow amid a lurch toward austerity, the path of least resistance for the ECB points toward (at least) a static posture, with the possibility of greater easing seemingly far greater than that of tightening.

Turning to risk sentiment, the landscape seems unclear with US equity index futures effectively flat in late Asian trade, putting the onus another batch of earnings reports with 24 S&P 500 companies including Boeing, Coca-Cola and ConocoPhilips set to announce second-quarter results late into the session.

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com

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