Quick Recap
The release at 11.30am this morning of Australia's second quarter CPI data is probably the single most anticipated data release for Aussie dollar traders in ages. That's because after the shock print of deflation in Q1 another low read on inflation is likely to reinforce that the RBA will cut rates at next week's board meeting.
As we've seen in the recent performance of the Kiwi expectations about the central bank are key to the performance of the Aussie dollar.
What You Need To Know
Background
The release of Australia's first quarter CPI 3 month's ago was a huge surprise for markets. The print of -0.2% for the quarter showed that Australia was not immune to the forces of global deflation.
That number saw the headline rate drop to 1.3%.
Core inflation was just 0.15% higher which meant the year on year rate dipped to 1.55%.
Both measures were well below expectations and well below the RBA's target band. So the Reserve Bank board made the decision to cut rates to a record low level of 1.75%.
Today's release
Today's release of second quarter CPI is widely expected to be back in positive territory with the market's best guess of a rise of 0.4% for the headline inflation rate during the quarter. That, because of a large number dropping out, will see the year on year rate drop to 1.1% if the market is correct.
That would be the slowest rate of year on year inflation growth since 1999 if the market is correct.
Looking at core inflation the market is also looking for an increase of 0.4% on the quarter. That would see the rate of core inflation print 1.4% for the year - the lowest level ever.
Inflation expectations and the RBA
Clearly it is not hard to see why the market is betting that the RBA will need to cut rates next week. Low inflation has proved to be a pernicious threat to overall economic growth in individual, and the global, economies because of the impact on consumer behaviour.
That is if consumers believe that inflation is likely to persist at a low level the incentive to spend today, to beat price rises in the future is diminished. That then impacts on aggregate demand in the economy and growth slows.
So inflation expectations are important. And even though Australian consumer inflation expectations have risen around 0.5% since the last RBA rate cut another low number could threaten that.
So a low number is likely to see the RBA ease just to support expectations as much as the economy.
The Aussie dollar and the RBA
As I noted in the quick recap expectations about the actions of the RBNZ have been important for the Kiwi dollar. So far, even with the market expecting a low print for inflation and a resultant RBA rate cut the Aussie dollar is hanging tough.
Indeed it bounced into 0.7540 region overnight before pulling back to around 75 cents now.
So does the RBA, or inflation even matter?
The simple answer is yes.
A low print will see expectations grow for rates to collapse toward 1% which should see the Aussie down toward support at 74 cents and if that breaks solid, post-Breixt, support at 73 cents could come into view. A break would open the way to 0.7150
On the topside if the NAB is correct and the CPI prints 0.7% for the quarter then this, and the fact that the NAB business survey shows such strong business conditions, trading, and profitability would suggest the RBA is on hold.
recent highs at 0.7640 would swiftly come into view. A break would open the way to 0.7800/50.
Here's the weekly chart:
Have a great day's trading
Greg McKenna
Chief Market Strategist AxiTrader