The Day Of Reckoning For Aussie Dollar Bulls And The RBA Is Here

Originally published by AxiTrader

The Australian dollar remains happily above 79 cents again this morning sitting at 0.7935 as I write.

On a night where the US dollar came under heavy selling pressure once again before some solid data, a big rise in bond rates, and stocks posting new record highs all combined to lift it from its nadir.

That saw the Aussie pullback from its overnight high around 0.7970. But all things considered, and before what could be a mega couple of hours between 11.30am and 1.30pm today, the Aussie's level of 0.7935 is still very strong.

That 2-hour window is going to be huge for the Aussie dollar, perceptions about the path of interest rates, and the outlook for the economy. So it is also a materially market moving window.

June quarter CPI at 11.30am gets things going.

The market is looking for headline CPI to print 0.4% following on from the first quarter's 0.5% rise. That would lift year on year headline inflation from 2.1% to 2.2% for Q2.

So far so good, inflation to hold inside the RBA's 2-3% band.

But the market is expecting RBA's favoured measure of inflation - the trimmed mean - to print 0.5% which would see the yoy rate dip to 1.8% from the first quarters 1.9% level.

Potentially not so good for the Aussie if forecasters are right.

But these are expectations so the risk is not these numbers but a divergence from them. To that end, we'd probably need to see headline and underlying inflation rates at 0.3% or lower for the market to belt the Aussie dollar. Topside 0.6% or above will bull the market and heaven forbid if underlying is able to sneak back to 2%. The bulls will run wild.

Just 90 minutes or so after the release of the inflation data RBA governor Phil Lowe will address a lunch at the Anika Foundation.

As I wrote earlier in my Morning Markets Wrap the Anika Foundation lunch was usually the most important speech of the year – the most influential, scene setter – for Lowe’s predecessor Glenn Stevens.

So I wonder if governor Lowe will follow this lead. If he does it is going to be hard for him to temper the emerging excitement about the Australian economy at the moment. The focus on headwinds has given way to a recognition the outlook the NAB business survey, and jobs market points to is suggestive of the RBA’s own bullish forecasts for growth.

Certainly inflation in Australia – like other developed markets – remains quiescent. That’s a point Lowe is likely to highlight as he tries to restrain expectations about rate hikes and a stronger Aussie dollar. He’s likely to highlight that this lack of inflation gives the RBA room to let the economy evolve without having to raise rates soon. And he’s likely to highlight and reiterate Guy Debelle’s message from last week that this higher AUD/USD, and TWI, IS complicating the economic transition and outlook. But as I noted yesterday in my Aussie dollar piece it is looking increasingly difficult for the RBA to argue against its own bullish forecasts on the outlook for Australian growth.

Lowe needs to send a clear signal the inflation outlook and low wages growth give the RBA plenty of room to leave rates where they are. And ultimately he has to hope the US dollar will turn around.

It's going to be a big day.

Looking at the price action and the daily outlook hasn't changed materially from what I said yesterday morning. That is, "the Aussie is showing all the signs of topping in the immediate term. But in the grand scheme of things this top only presently suggests a pullback to 0.7728/30 (38.2%) or maybe 0.7730 (61.8%) or somewhere between those two levels".

Chart

But with two very big potential catalysts today it's worth drilling down a time frame to look at the 4-hour chart to see what the short term levels to watch are today.

On that front, it is clear the Aussie has a little wedge pattern that it has formed since last week's highs. The parameters at present are 0.7969/70 on the topside and 0.7914/16 on the bottom. There is a little more support at 0.7904.

Naturally the Aussie also has solid resistance at last week's high around 0.7988ish. But if the Aussie breaks either side of this range we could see a big extension.

Chart

Have a great day's trading.