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Australian dollar lowers CPI, which draws attention to RBA. Where is AUD/USD headed?

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Australian Dollar, AUD/USD, CPI, Inflation, RBA, Budget, AUD/JPY – Talking Points

  • The Australian dollar went sideways after the CPI beat expectations
  • Headline CPI at 7.3% gives RBA food for thought after dovish tilt
  • Bond yields have slipped north, but the RBA will be in the spotlight next week

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The Australian dollar steadied after CPI turned hotter than expected. Of particular concern is the increase in the preferred measure of the abbreviated mean RBA. Australian Commonwealth Government Bond (ACGB) yields rose sharply amid the shock.

Based on today’s data, the RBA was expected to match its October rate change at its November meeting this Tuesday and hike by just 25 basis points (bps). Today’s numbers will see a reassessment of that scenario. In any case, the rejection of a 50-baht raise in their last meeting does not bode well.

Source: Bloomberg, ABS

A mistake in the policy of the US Federal Reserve System contributed to the acceleration of price pressure, which prompted the bank to repeatedly increase the rate by 75 basis points. Now the question arises about a potential policy mistake on the part of the RBA.

The minutes of the RBA’s last meeting illustrated their expectation that inflation will exceed 7.0% in 2022 before easing next year. This assumption is based on the fact that inflation has not taken hold.

The acceleration of the shortened average is an alarming indicator of the underlying dynamics in the economy.

Wage pressure is said to be mild, but the longer inflation remains high, the more businesses will have more welfare recipients in their wallets.

Increasing their ability to pay more for goods and services. That’s excluding those who quit to take a higher-paying job that doesn’t come with a pay rise.

The Australian government released its annual budget on Tuesday night, and it was generally hailed as a fiscally responsible budget. It was noted that energy prices will be significantly higher over the next 18 months, but there were no hints on this.

The argument that has been made is that easing fiscal policy is likely to lead to inflation at a time when price pressures are uncomfortably high and monetary policy is struggling.

This is in contrast to the controversy surrounding the recent episode of the mini-budget announced by British Prime Minister Liz Truss, which led to her death.

In any case, fiscal policy that is not easing could give the RBA room to be less hawkish, but ultimately a rise in the shortened CPI average will be a cause for concern. If the RBA rises by 25 or 50 basis points next week, it seems that AUD/USD can ignore it.

AUD/USD3 YEAR AU BOND AND 10 YEAR AU BOND

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— Posted by Daniel McCarthy, DailyFX.com Strategist

Follow and connect with Daniel via @DanMcCathyFX on Twitter

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