Talking Points:
- Australia’s 4Q CPI 2.7% y/y versus 2.4% expected, 2.2% in 3Q
- Aussie Dollar Soars as Inflation Pickup Bolsters RBA Policy Bets
- Markets Now Look to Chinese PMI Figures for Direction Cues
The Australian Dollar soared after fourth-quarter CPI figures surprised to the upside, pushing the currency above the US 0.8850 level. The year-on-year reading printed at 2.7 per cent, the highest level since December 2011. Economists were forecasting a more moderate 2.4 per cent reading ahead of the release.
The inflation gauge is nearing the top of the RBA’s 2-3 per cent target range, which seemingly reduces the chance of another interest rate cut from the central bank. This improves the Aussie’s yield-based appeal. Indeed, the currency’s move higher was mirrored by a rally in Australian government bond yields, suggesting an improvement in RBA policy perceptions.
However, the Reserve Bank expects broader inflation to remain contained due to the soft labour market outlook, which may suppress wage growth. This suggests that a rate hike is still unlikely and that the cash rate may remain at record lows in the near term to aid in the rebalancing of the Australian economy.
The upcoming China HSBC Flash PMI data may help the Aussie hold onto some of today’s gains if we see the reading echo Monday’s encouraging fourth quarter Chinese growth figures. While China’s economy may not be reaccelerating, the tentative signs of stabilization bode well for Australian exports. This in turn helps reinforce supportive RBA policy views, bolstering the Australian unit.

AUD/USD 5min Chart, Created with FXCM Marketscope
--- Written by David de Ferranti, Market Analyst, FXCM Australia
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