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Australian Dollar Slides Thanks to CPI Miss

Australian Dollar Slides Thanks to CPI Miss

David Cottle, Analyst

Talking Points

  • Australian CPI inflation came in below expectations in the last three months of 2016
  • The Aussie Dollar duly slipped
  • It seems the markets think rates certainly won’t be rising anytime soon, even if they fall no further

The Australian Dollar slipped a little on Wednesday after official consumer price index data came in below expectations.

The CPI rose 0.5% in the final three months of 2016 compared to the quarter before, for an annualized gain of 1.5%. The markets had been looking for respective gains of 0.7% and 1.6%. Annual inflation has not been above 2% since the third quarter of 2014. The Reserve Bank of Australia’s mandate is to keep it between 2% and 3% over the economic cycle.

The latest data suggest that price rises are certainly not a problem for the Australian economy at present and that, compared to the RBA’s target, the economy could do with a bit more pricing power. The upshot of this is that higher Australian rates remain unlikely for now even if the record low 1.5% cash rate goes no lower. Foreign exchange markets have clearly spotted that this morning in Asia.

CPI inflation has been creeping higher for three straight quarters now, but remains historically low and under the 1.7% level at which it started 2016.

AUD/USD slipped to 0.75656 after the numbers, from 0.75979 before their release, with the Aussie falling against the likes of the Yen, Euro and British Pound too. With the US Federal Reserve apparently still on course for more interest rate rises this year, the Aussie Dollar’s comparative charms could fade further. Not that that is likely to unduly worry the RBA. A weaker currency would increase the price of imported goods, perhaps raising overall inflation closer to target.

In any case the RBA has been known to fret publicly about its currency’s strength.

Small CPI miss, quick AUD drop:

Australian Dollar Slides Thanks to CPI Miss

Chart compiled using TradingView

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--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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