Eyes remain on the 80c level ahead of the weekend as traders try to decipher if the USD correction higher could hold or fold.
PPI data gave a nice boost to inflation’s potential today despite missing expectations on a quarterly basis. Whilst the QoQ read of 0.5% missed the 0.6% forecast, it has expanded at this rate for three quarters which helped the annual rate to expand at 1.7%, its highest level since Q4 ’15.
Inflation earlier this week received mixed reviews with some disappointed CPI didn’t pick up and other, like ourselves, see it as part of the basing period required before inflation picks up. Yes, broad CPI disappointed yet this also includes food and energy. The preferred RBA reads hit consensus and continue to suggest a base may be forming and today’s PPI data provides inflationary hope.
For the expansion to continue, we need to see the underlying index close the gap from its own long-term trend. The rate of expansion has slowed since Q1 2014 which doesn’t bode well for the longer-term trend. But near-term there is potential for PPI and inflation to move higher from its current base.
The narrow candles presented don’t really provide a directional clue as to which way it could move or spike at London open. If we had to take a punt, we’d prefer to use a sll-limit below 80c with a view to catch any spikes and profit from an eventual downside move. Yet note that this is counter to the preceding trend and potential sport awaits at the 50 eMA and bullish channel. If we are correct to assume a bullish extension for USD ahead of the weekend, we ay find the bullish channel tested to the downside, yet if Q2 GDP disappoints then we may find ourselves closer to 80c
To be confidence a break above 80c is genuine, we would prefer to see USD broad weakness as opposed to AUD in isolation. For bullish setups we can consider AUDCHF, as this is been the more bullish story of the week for AUD after SNB’s Jordon reiterated that the Swiss Franc is “significantly overvalued” Technically the cross points higher and could be headed for 0.78 next week.
The RBA will be in focus against next week to see if wording of their statement becomes more aggressive in light of the stronger currency. The trouble the RBA now face is there’s really little they can do if the US Dollar continues to unravel the way it has recently. Thankfully for them, we think USD is due a correction as multiple FX crosses have hesitated at key levels, which may tempt bears to close out ahead of the weekend.
