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FXstreet.com (Bali) - Australia's CPI numbers (QoQ/YoY) are due at 00.30GMT, with the Q4 CPI
‘headline’ expected at +0.4% vs prior of +1.2%, while the y/y is expected at 2.4% vs prior 2.2%. As to the ‘trimmed mean’ (measure the RBA focus the most), bearing in mind the RBA sets the ‘core’ inflation in a target band of 2% to 2.5%, the QoQ expected is at 0.6% vs prior of 0.7%, with the YoY expected at 2.3% vs unchanged prior of 2.3%.

Despite the recent weakness in the Australian jobs market, traders will have to factor in the latest quarterly inflation results in order to understand how much room for maneuver the RBA can allow itself. A number too high against the RBA standards should force the central bank to stay on the sidelines even if other domestic indicators continue to deteriorate.

On the contrary, if the numbers are well contained, it will provide further ammunition (potential lower rates) should it be required, although the ongoing rise in housing prices does not allow much further easing, as it may cause an undesirable boost in housing prices.

Traders should be aware of the optimism for today, if only based on last Monday's TD Securities/Melbourne Institute inflation gauge for December, which saw the series tick higher, despite December happens to be a rather volatile month for due to seasonality. Overall, it looks like the risk for the AUD may be slightly skewed to the upside.

Westpac's view

As Westpac's FX Strategist Sean Callow notes:

"A number around our expectation - we look for the CPI to print at 0.7% q/q (2.4% y/y), just above consensus for 0.6% (Q3 was 0.6%) - should further dampen RBA rate cut talk stirred by the Dec jobs data and produce a modest pop on AUD/USD. While above the market for Q4 13, Westpac sees underlying inflation remaining muted in 2014, around the middle of the 2-3% target range, not a likely worry for the RBA this year."

AUD/USD reaction

In case the CPI numbers come on the high end, making the RBA uncomfortable, the Australian Dollar will possibly pop higher aiming to test 0.8840 offers ahead of 0.8850+ rumored stops. However, traders should be reminded that the latest rallies in the Aussie on positive data were most 'counter-intuitive' moves being immediately faked by well camped sellers, thus approach any rise in prices as a potential sell opportunity. On the contrary, a low CPI suggests a possible test of 0.8770 support ahead of new lows.
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