Originally published by AxiTrader
Quick Recap
The AUD/USD was quietly bid all night last night making a high of 0.7654 before drifting back a little in the past few hours to sit at 0.7639 as traders await the release of the vitally important thrid-quarter CPI data this morning at 11.30am.
That the Aussie was bid even as the US dollar posted new multi-month lows against the Euro, Yen, and pound highlights again the level of support that remains intact for the AUDUSD in the current environment. But as we have been discussing lately it is idiosyncratic data and events relating to the non-US dollar side of forex pairs which are the key drivers at the moment.
That means the CPI and where it prints is key to the short-term outlook for the Aussie dollar against the US and on the crosses.
What You Need To Know
My expectation is that Australian CPI will follow the trend we have seen in prints from all over the world in data released this month of a gradual return of inflation across the globe.
But data is data and we don't know exactly when or what the RBA surveyed as part of its basket so there is a chance that there could be a lag between this data and the extra 30 cents a litre we are paying at the petrol pump over the past 6 week or so.
That makes today's print of vital importance for the other - in both directions.
The Reuters poll shows that headline inflation is expected to print 0.5% qoq which is expected to translate into a still weak 1.1% headline outcome. Th trimmed mean, the one economists like to focus on, is expected to print 0.4% and 1.7% respectively.
For me I strongly believe that contrary to usual practice the RBA will be more focussed on headline inflation rather than the more academic notion of the trimmed mean which strips out some of the quarter on quarter volatility of the headline release (yes Australia only gets quarterly compared to the monthly data in other countries).
But in the same way that the Fed is focussed on headline inflation, not core which is above 2%, the RBA is part of he new recognition that observed inflation is what is important for the economy, for consumers and for business.
For example RBA governor Lowe last week explained why the banks objective is to deliver average inflation in the 2-3% range is so important:
"By achieving this we can provide a strong medium-term anchor for people's inflation expectations and reduce one element of uncertainty in the economy. This is an important precondition to sustainable growth in employment and incomes. Most people can cope without too much difficulty with a bit of variation in inflation from year to year, but it is the medium-term uncertainty that is really damaging to planning".
So when he also said "with headline inflation rates so low, many workers have agreed to smaller wage increases than would have otherwise been the case, especially where expectations of future inflation are also low. The low wage increases have in turn reinforced the low inflation outcomes" you can see why headline inflation is so important to the RBA.
That means a surprise to the downside with a 0.3% or a 1% or lower print for the year on year rate of growth is likely to see expectations grow that the RBA could cut rates as soon as next Tuesday's meetings. It's worth noting the last two cuts were associated with the release of inflation data.
Such an outcome would likely see the Aussie dip toward support in the 0.7580/7600 region and if that breaks then the 7450/7500 region comes into the frame. Crucially though a break of 0.7535 would breach the uptrend from the lows below 70 cents
Now of course a strong number, one the market is clearly expecting given the AUDUSD strength is likely to see the Aussie rally back toward 77 cents. What constitutes a strong number is probably 0.6% or higher on the headline number and something similar on the trimmed mean, maybe 0.5% or higher. I know the tolerances are very small but that's data.
Have a great day's trading