Weak inflation is not an ideal scenario for a central bank which is looking to improve it. Yet as trimmed and median hit consensus and RBA expect inflation to be variable then it may not be as bad as first feared.
Broad CPI read let the team down by missing expectations and softening on a quarterly and annual basis. Broad weakness for AUD ensued where AUDNZD felt the biggest squeeze just moments after the release. Trimmed mean, the RBA’s preferred inflationary gauge softened form 1.9% YoY to 1.8%, yet this was the consensus figure, so this may not come as too much of a surprise.
Debelle may be feeling a touch of ‘I told you so’ and now Lowe may get to rub it in a little, but overall the downside for AUD is limited. Today’s CPI data doesn’t really change the underlying issues of a higher AUD; the US Dollar remain on the back ropes and AU sensitive commodities remain elevated. Until this scenario changes then verbal interventions will only provide limited pullbacks but, for now at least, 80c appears to be safe from bulls.
As quarterly CPI for weighted and trimmed have moved sideways for two quarters (three quarters for trimmed) then we expect a basing effect to take hold on these measures and support them. Although headline CPI has moved lower, this is partly to do with lower petrol prices and, whilst still followed by the RBA, is not their favoured measure as it is more volatile.
When you break down the CPI data into sectors, it has predominantly been led higher by health, with furnishings, alcohol & tobacco and housing. The biggest drags on the headline figure are recreation & culture, transport, communication, clothing 7 footwear and food & non-alcoholic beverages.
AUD has respected the weekly pivot (0.7894) to provide interim support ahead of the Fed meeting. We may find the 0.7873 level also tested upon any spikes lower but in all the time we remain above the 2016 high, we expect traders to buy the dip and take advantage of the weaker Greenback.
The downside on AUDJPY has also been limited as market sentiment overnight was a classic risk-on. Stocks broke to new highs and dragged yields higher whilst VIX moseyed on down to a record low. This environment favours carry trades such as AUDJPY, so we continue to think AUDJPY may eventually move its way to Y90 over the coming weeks unless risk-off rears its ugly head.
GBPAUD could be setting up for a swing trade short. 1.65 resistance is close to monthly S1 which allows for a little noise around this bearish zone. If we are to see Sterling move lower then this should help GBPAUD towards an inverted hammer or bearish signal of some sorts. If you were confident resistance may hold then a market order or sell-limit may be used to capture an anticipated move. Or for extra confirmation, await for NY close to assess the daily candle or simply use a sell-limit beneath today’s low as part of a set and forget entry.
