Important CPI data could prompt the RBA to take action

Australian dollar forecast: bearish

• The Australian dollar popped up last week as USD dominated the proceedings
• Inflation gauges are problematic elsewhere and the RBA is about to meet their fate
• If AUD/USD break the current range, or build momentum in that direction?

Last week, the Australian dollar traded in a range of 0.6186 – 0.6356 as local and international news and data supported the currency.

In the domestic market, jobs data was a bit of a disappointment, with the total change in employment for September coming in at 0.9k instead of the expected 25k. Full-time employment rose by 13.3k, while 12.4k jobs were added. part-time positions were lost in September.

The unemployment rate was unchanged at 3.5% against a forecast of 3.5%, and the participation rate also printed as expected and was unchanged at 66.6%. The unemployment rate remains at a generational low.

Despite this, the RBA’s upcoming November meeting is expected to match the rate changes in October and increase by only 25 basis points. That compares with the Federal Reserve, which is expected to raise its target rate by 75 basis points when it meets the day after the RBA.

The relative dovishness of the RBA may continue to undermine AUD/USD. Ahead of the monetary policy meeting on November 1, an important third-quarter CPI is expected.

Changes will be made to the reporting of this data point going forward, with the Australian Bureau of Statistics (ABS) providing monthly updates between the quarterly figures, which remain the key indicator of inflation.

These monthly readings will comprise 62-73% of the basket used to measure the quarterly performance. More information can be found on the ABS website here.

In any case, the third quarter CPI will be closely watched this Thursday, and the benign reading will confirm the RBA’s relatively cautious approach. The hot number could put more pressure on the bank to raise rates at a faster pace.

The U.S., U.K. and Canada saw inflation pick up again in their latest measurements, while Euro-The broad gauge was stable at the level of 1.2% only in the month of September.

In all these economic sectors, the CPI in the second quarter is higher than in Australia (6.1% y/y).

The US experience is particularly noteworthy, not least because it is the largest economy in the world, but because much of the Fed’s current problems are of its own making. They have left politics too loose for too long.

The terms “base effect” and “transition” have become embarrassing monikers for those involved, and only time will tell if the RBA has acted quickly enough.

Interest rate differentials further up the yield curve are also undermining AUD/USD, as shown in the chat below. The CPI could be the trigger for a change in the structure of interest rates, which could lead to momentum building if it unfolds.

Elsewhere, the commodity complex is also feeling pressure through strengthening US dollar with iron ore trading near its lowest for the year. Rio Tinto announced this week that they had missed their iron ore export target by 1%, but BHP were aware.

A generally lower AUD/USD exchange rate has largely offset these declines, with trade surpluses continuing to hover around AUD$10 billion per month.

AUD/USD AUSTRALIA AND US 2Y AND 10Y BONDS SPREADS

The chart is created in TradingView

— Posted by Daniel McCarthy, DailyFX.com Strategist

Please contact Daniel via @DanMcCathyFX on Twitter