Australian inflation to cool in Q3 Forex News Preview

Australian inflation to cool in Q3 – Forex News Preview

Posted on October 30, 2018 at 4:44 pm GMTChristina Parthenidou, XM Investment Research Desk

Early on Wednesday at 0030 GMT, the Australian Bureau of Statistics will publish inflation figures for the third quarter. Consensus is for prices to have grown at a slightly slower pace, something the Reserve Bank of Australia would probably not be happy to hear as the central bank is seeking stronger inflationary pressures before commencing the next rate hike cycle. The view however is that even in case of an upward surprise, policymakers are most likely to stand pat on policy until wages show a significant but a sustainable improvement.

In the second quarter, the Australian headline Consumer Price Index (CPI) arrived higher at 2.1% year-on-year but key core measures averaged around 1.9% y/y, undershooting the RBA’s 2-3% inflation target band for the tenth consecutive quarter. Despite that, policymakers remained confident that inflationary pressures would rise in subsequent months through a stronger labor market.

Indeed, September’s employment report surprised markets by showing that the unemployment rate dropped to the desired 6 ½ -year low of 5.0% from 5.3% previously, indicating that the economy is finally operating under full-employment – a pivot point for wages to start accelerating. Wage growth, however, ticked slightly up in the second quarter, remaining around historic lows. For the three months to September, analysts believe that wage growth has not accelerated, raising speculation that the 5.0% full-employment threshold might not be enough to trigger steeper wage increases and thus a quicker inflation pace. As a result, and in combination with falling house prices inflation might have lost steam in the three months to September. Analysts believe that the headline CPI retreated to 1.9% y/y, while the trimmed mean and the weighted median CPI which trim for volatility are seen steady at 1.9%. Note that Westpac’s consumer sentiment index turned increasingly negative in August and September, offsetting July’s strong recovery.

In FX markets, aussie/dollar was under severe pressure between July and September, losing 2.6% from its value to touch 2 ½ -year lows. In October, the pair continued to depreciate, unlocking fresh bottoms as trade tensions between the US and China did not de-escalate. Unlike the RBA which messaged that interest rates will not pick up until late 2020, optimism about further monetary tightening by the Fed in the next two years strengthened, wiping out demand for the aussie.

Should inflation beat forecasts, aussie/dollar might extend gains towards 0.7157, the 38.2% fibonacci of the downleg from 0.7380 to 0.7020 and a peak on October 17. A bigger surprise in the data, may also open the door for the 50% Fibonacci of 0.7200, while if this proves a weak obstacle, traders could turn attention to the 61.8% Fibonacci of 0.7242, where the price found support on August 23.

In the alternative scenario, disappointing prints may suggest rates stay lower for longer than what markets are currently pricing in, sending the pair below the 0.7100 round level. In this case, immediate support could come at 0.7054, where the price paused in previous sessions. Lower than that, eyes would turn to Friday’s 2 ½ -year low of 0.7020 which if broken, negative momentum could accelerate towards the 0.6900 round level.

Yet, investors might prefer to show patience until next week when wage numbers will shed further light on the inflation dynamics.

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