Release: AUS Consumer Prices (4Q)
Consensus Forecast: 0.2%Previous: 0.6%Date/Time: 01/24/12 7:30PM ET (01:30 GMT, 01/25)
Can Australian CPI Data Set a Swing High in AUD/USD?
While the fundamentals are not uber important for the Aussie these days as the currency markets mainly trade based on sentiment and performance in equities and commodities, if there's 1 indicator to keep a close eye on when trading the Australian Dollar it is the government's quarterly CPI data.
The path for inflation is especially important for any central bank and it's no different for the Reserve Bank of Australia (RBA).
The expectation is that inflation will cool to a 0.2% q/q pace in the 4th quarter, from 0.6% in the 3rd quarter. That would be a significant cooling and would give the RBA further scope to consider lowering interest rates if economic conditions warranted it.
The core or trimmed mean CPI is expected to come in at 0.5% q/q, compared to the 0.3% seen in the 3rd quarter.
4th quarter PPI already came in pretty soft (0.2% q/q) to start the week which should act as a leading indicator for CPI in the 1st quarter of 2012.
If CPI undershoots this consensus forecast then the RBA will be closely monitoring other key indicators such as employment, domestic demand (retail sales, motor vehicle sales) and housing to decide whether to lower rates further from 4.25% after 50 basis points of cuts in the 4Q of 2011.
As we can see below, employment has been very uneven with the last 4 out of 6 months, and the last 2 months showing an economy shedding jobs. That will weigh heavily on the RBA.
If inflation comes in stronger than expected, then the RBA, despite what it sees from other economic indicators may be hesitant to pull the trigger on further rate cuts.
AUD/USD Hits 1.06, Retreats in Tuesday's Session
Looking at the AUD/USD, we can expect the Aussie to weaken further in the Wednesday Asian session if CPI is soft. That could turn into further weakness if Europe follows up with another risk-off session on the back of worries about the Greek debt negotiations and rising sovereign debt yields. Now, risk did manage to rebound in the later parts of the NY trading session as did the AUD/USD after testing the 30 level in the hourly RSI.
The conditions are therefore in place for shorting the pair on a weak CPI release when it reaches the 50% or 61.8% of the most recent downswing. If the CPI comes in stronger than expected, and bolsters the AUD/USD from a fundamental perspective, then we would be looking to see if the high set in Monday's global session near 1.0570 holds.
AUD/USD in Daily Timeframe Poised to Fall Or Extend Break of Trendline?
Looking at the higher timeframe, the AUD/USD in the daily we are at important fork in the road. The pair trades above all of its key moving averages and this week pushed above an important downward sloping resistance trendline.
At the same time it has approached and tagged the 70 level in the RSI. Over the last 9 months, when the pair has reached this overbought level it has tended to follow with some type of correction or blow-offs.
Could the high this week at 1.0580 become a swing high?
The CPI data will be key. If the market sees a weak print, and decides that the RBA is more likely to lower rates in the 1st half of the year, that would begin to be priced in as it gives the RBA more scope to loosen policy.
I was looking for some softer data from China to really round off this fundamental analysis as that would be 1 more factor that the RBA strongly considers in its outlook, but we haven't really gotten that.
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