Australian Dollar, CPI, Chin PMI, Talking Points:
- Australian inflation came in a little weaker than expected in the third quarter
- Its annualized deceleration was expected, but still psychologically significant
- Chinese manufacturing underwhelmed too, and is now only just expanding as a sector
Fourth-quarter technical and fundamental forecasts from the DailyFX analysts are out now.
The Australian Dollar took a hit Wednesday from domestic and Chinese data which both came in weaker than expected.
China’s official manufacturing Purchasing Managers Index for October was 50.2, below both the 50.6 forecast and September’s 50.8. In the logic of PMIs any reading above 50 signifies expansion for the sector in question, so Chinese makers are only in that zone by a whisker on current evidence. Moreover, October provided the weakest print since July 2016, and suggests that US trade tariffs are taking their toll.
The non-manufacturing PMI also slipped from October, but it was perkier at 53.9. AUD/USD slipped on the manufacturing news, with the Aussie clearly playing its sometime role as liquid China proxy.
And this wasn’t the first economic release to hit the currency Wednesday. Domestic inflation slowed too.
Official Consumer Price Index data for the year’s third quarter showed an unexpected deceleration. Inflation rose at a 0.4% quarterly rate, below the 0.5% expected. Compared to the same peiod of 2018 the CPI was up by 1.9%, this was as the markets had forecast and below the 2.1% rate seen in the second quarter. This objectively small pullback carries significance, however because it once again takes inflation below the Reserve Bank of Australia’s target band. The RBA is supposed to keep annualized CPI gains between two and three percent over time, and has notably failed to do so this year.
The latest data show that the target remains elusive even with interest rates stuck and record lows and thought likely to remain so for all of this year and next, according to futures markets.
The yawning gap in interest rate expectations between a mired RBA and a consistently tightening Federal Reserve is the key reason for AUD/USD’s clear struggle this year.
The Aussie has been sliding for the vast majority of 2018. Wednesday’s reminder of the stubborn weakness of domestic inflation – and the consequent likelihood that interest rates are going nowhere will do nothing to help its battered bulls.
The RBA will set monetary policy for November next week. On current evidence the markets can expect a very dovish performance from Governor Philip Lowe and his colleagues.
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--- Written by David Cottle, DailyFX Research
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