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THE TAKEAWAY:Australian inflation reported within expectations > AUD gains erased by soft HSBC Chinese manufacturing data > AUD/USD Lower

The Aussie traded higher against the US Dollar after Australian inflation in the second quarter printed virtually in line with expectations, growing 2.4 percent year over year. However, gains were quickly erased as the pair moved lower on soft HSBC flash manufacturing PMI for China. As Australia’s largest trading partner, an economic slowdown in China will likely translate to reduced demands for Australian exports.

Independent data from HSBC is becoming increasingly more important as doubts arise over the accuracy of data released by the Chinese government. For example, although import and export data in early May looked robust year over year, many of China’s major trading partners are reporting different trends in their data. Thus price action in the Australian dollar can represent expectations on current and future growth.

Whether these releases compels the Rerserve Bank of Australia to revise monetray policy remains uncertain. After last week’s Reserve Bank of Australia meeting minutes said the current outlook for inflation may provide “scope for further easing,” these two releases may fuel expectations for the central bank to act in August to encourage economic growth. A rate cut could make the currency less attractive for yield-seeking investors, sending the pair lower. However, Credit Suisse’s overnight index swap expectations for an interest rate reduction declined 11 percent to 54 from yesterday’s 65 percent.

Looking ahead, U.S. data tied to durable goods and labor markets will likely influence investor expectations on Federal Reserve policy. Durable goods data is scheduled for release tomorrow at 12:30 GMT and NFPs are scheduled for release next week.

AUD/USD (5-Minute Chart)

AUDUSD_Higher_On_CPI_But_Lower_on_Chinese_Manufacturing_Expectations___body_Picture_1.png, AUD/USD Higher On CPI But Lower on Chinese Manufacturing ExpectationsSource: FXCM Marketscope

New to Forex: http://www.youtube.com/watch?v=Sb-El6sMBtM

Jimmy Yang, DailyFX Research Team

Gregory Marks, DailyFX Research Team

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