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Australian Dollar Snubs Red Hot CPI that Puts the RBA on Notice. Where to for AUD/USD?

Australian Dollar Snubs Red Hot CPI that Puts the RBA on Notice. Where to for AUD/USD?

Daniel McCarthy, Strategist

Australian Dollar, AUD/USD, CPI, Inflation, RBA, Budget, AUD/JPY - Talking Points

  • The Australian Dollar went sideways after CPI beat expectations
  • A 7.3% headline CPI gives the RBA something to mull over after a dovish tilt
  • Bond yields skipped north, but the RBA will be the focus next week
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The Australian Dollar steadied after CPI came in hotter than anticipated. Of particular concern is the increase in the RBA’s preferred measure – the so-called “trimmed mean”. Australian Commonwealth Government bond (ACGB) yields soared on the shock numbers.

Going into today’s data, the RBA were anticipated to match their October rate move at their November meeting and hike by only 25 basis points (bps). Today’s figures will see a re-assessment of that scenario. In any case, a pullback from a 50 bp lift at their last meeting doesn’t bode well.

Source: Bloomberg, ABS

A policy error by the US Federal Reserve aided an acceleration of price pressures that pushed the bank to multiple jumbo hikes of 75 basis points. Worries about a potential policy error from the RBA are now emerging.

The minutes from the last RBA meeting illustrated their expectation that inflation would sail past 7.0% in 2022 before easing next year. This assumption relies on inflation not becoming entrenched.

The acceleration of the trimmed mean measure is a worrying indicator of underlying dynamics within the economy.

Wage pressures have been cited as not overtly strong, but the longer headline inflation remains elevated, the more enterprise agreements and welfare recipients will have more in their wallet further down the track.

Increasing their capacity to pay more for goods and services. This is outside of those that have resigned to go to higher paying jobs that do not show up as wage rises.

The Australian government released their annual budget on Tuesday night and overall, it has been received as a fiscally responsible budget. It was noted that energy prices will be significantly higher over the next 18-months but there were no handouts on this front.

The argument that was made that a loosening of fiscal policy would most likely add to inflation at a time when price pressures are uncomfortably high and being fought by monetary policy.

This is in contrast to the controversy over the recent episode of the mini budget announced by former UK Prime Minister Liz Truss, which led to her demise.

In any case, a fiscal policy that is not loosening might give the RBA room to be less hawkish, but ultimately a pickup in trimmed mean CPI will be of concern. If the RBA hike by 25 or 50 basis points next week, it appears that AUD/USD may ignore it.

AUD/USD, 3-YEAR AU BOND AND 10-YEAR AU BOND

Chart created in TradingView

--- Written by Daniel McCarthy, Strategist for DailyFX.com

Follow and contact Daniel via @DanMcCarthyFX on Twitter

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

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