Australian Dollar Plunges on Softer CPI Data
THE TAKEAWAY: CPI data shows slowing price increases > Data implies greater scope for rate cuts, monetary easing > AUD falls
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The Australian Bureau of Statistics reported that CPI in the third quarter rose 3.5 percent YoY (vs. 3.6 percent in Q2) and 0.6 percent QoQ (vs. 0.9 percent in Q2), in line with expectations. At the same time, a measure of core inflation using the RBA’s trimmed-mean methodology slowed to 2.3 percent YoY from 2.6 percent in Q2. These figures point to a slowdown in inflation, and suggest that quarter-over-quarter price rises continue to slow after reaching a high of 1.6 percent in Q1 2011. Inflation could slow further as the effects on food prices of the Queensland floods earlier this year fade.
Wednesday’s inflation figures reinforced expectations that the RBA will cut the developed world’s highest interest rate at its next meeting on November 1. According to Credit Suisse data on overnight-index swaps, market expectations for a rate cut surged following the data release, with the swaps now predicting certainty of at least a 25 bp point cut next Tuesday. Over the next 12 months, swaps now expect 121 bps of rate cuts.
Coming on the heels of PPI data showing a similar slowdown in price increases, the CPI figures suggest reduced inflationary pressures and more scope for monetary easing. However, with mining investment in Australia remaining strong, falling unemployment, and a recovering construction industry, it remains to be seen how accommodating a stance the RBA is willing to adopt. Markets will be closely examining next week’s RBA statement for signals on the direction of monetary policy; a dovish tone can be expected to send AUD even lower against its US counterpart. In the meantime, risk sentiment – guided foremost by the outcome of the EU summit on Wednesday – will impact the Aussie in the coming days.
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