Can Australian CPI data lift the struggling aussie? – Preview
April 22, 2024 2:27 pm
Inflation numbers will be investors’ focal point in Australia this week
Doubts about RBA rate cuts have not been much support to the aussie
Will Wednesday’s CPI data (01:30 GMT) alter the policy outlook?
Is inflation levelling off?
Worries about sticky inflation have been a major frustration for the Reserve Bank of Australia, prompting it to hike rates one more time back in November in an unexpected move. Still, the overall picture in 2023 was one of an unmistakably downward trajectory in all CPI measures. And although inflation by the latest monthly reading is well below from where it stood a year ago, the most recent trend is concerning.
The consumer price index has been rising by 3.4% year-on-year since December and the consensus forecast for March is that the rate of increase remained unchanged at that level for the fourth month in a row. This is reflective of the general trend elsewhere such as in the United States where inflation appears to be levelling off above 3.0%.
However, this flatlining trend is unlikely to be evident in the quarterly measures just yet. Headline CPI is expected to have eased to 3.5% y/y in the first quarter from 4.1% in the prior three months. The trimmed mean and weighted median readings are also forecast to have moderated to 3.8% and 4.1% respectively.
RBA likely to stay cautious
This could support the argument for more patience by RBA policymakers, but there could also be a case to revert to a more hawkish stance at the next meeting on May 7, as the quarter-on-quarter change in CPI is expected to have accelerated from 0.6% to 0.8%.
The RBA dropped its tightening bias at its March meeting, suggesting that rates were restrictive enough. But those investors hoping that there would be a further dovish tilt in May look set to be disappointed. Rate cut bets globally have already been dialled back considerably in recent weeks on the back of the upside surprises in US inflation and investors now anticipate less than one 25-basis-point cut for the RBA in 2024.
Policymakers are unlikely to disagree with the current market pricing and may even raise the prospect of more tightening if the CPI numbers are hotter than expected. The question is, how much of a boost would this be for the Australian dollar?
Aussie’s mounting woes
Heightened geopolitical tensions, ongoing angst about China’s economy and US exceptionalism have all battered the aussie, which is down about 5.5% against its US counterpart in the year-to-date. Meanwhile, domestic economic performance has been patchy at best, with unemployment having edged up from the post-pandemic lows, consumption remaining sluggish and exports no longer being the growth driver they used to be.
But there is hope that the economy is gathering some momentum as the S&P Global PMI gauges have been ticking higher during 2024. If there’s a further improvement in the PMIs in April and the CPI report is also strong, the aussie could stage a rebound towards the $0.6500 handle.
However, whilst a move above $0.6500 would eliminate the downside risks, overcoming the 50- and 200-day moving averages, which have converged around $0.6530, as well as the descending trendline at slightly higher at $0.6550 could prove quite challenging.
Alternatively, if the inflation data increases the odds of rate cuts later this year and the aussie breaches the $0.6400 support, attention would turn to the October 2023 low of $0.6268.
Inflation numbers will be investors’ focal point in Australia this week
Doubts about RBA rate cuts have not been much support to the aussie
Will Wednesday’s CPI data (01:30 GMT) alter the policy outlook?
Is inflation levelling off?
Worries about sticky inflation have been a major frustration for the Reserve Bank of Australia, prompting it to hike rates one more time back in November in an unexpected move. Still, the overall picture in 2023 was one of an unmistakably downward trajectory in all CPI measures. And although inflation by the latest monthly reading is well below from where it stood a year ago, the most recent trend is concerning.
The consumer price index has been rising by 3.4% year-on-year since December and the consensus forecast for March is that the rate of increase remained unchanged at that level for the fourth month in a row. This is reflective of the general trend elsewhere such as in the United States where inflation appears to be levelling off above 3.0%.
However, this flatlining trend is unlikely to be evident in the quarterly measures just yet. Headline CPI is expected to have eased to 3.5% y/y in the first quarter from 4.1% in the prior three months. The trimmed mean and weighted median readings are also forecast to have moderated to 3.8% and 4.1% respectively.
RBA likely to stay cautious
This could support the argument for more patience by RBA policymakers, but there could also be a case to revert to a more hawkish stance at the next meeting on May 7, as the quarter-on-quarter change in CPI is expected to have accelerated from 0.6% to 0.8%.
The RBA dropped its tightening bias at its March meeting, suggesting that rates were restrictive enough. But those investors hoping that there would be a further dovish tilt in May look set to be disappointed. Rate cut bets globally have already been dialled back considerably in recent weeks on the back of the upside surprises in US inflation and investors now anticipate less than one 25-basis-point cut for the RBA in 2024.
Policymakers are unlikely to disagree with the current market pricing and may even raise the prospect of more tightening if the CPI numbers are hotter than expected. The question is, how much of a boost would this be for the Australian dollar?
Aussie’s mounting woes
Heightened geopolitical tensions, ongoing angst about China’s economy and US exceptionalism have all battered the aussie, which is down about 5.5% against its US counterpart in the year-to-date. Meanwhile, domestic economic performance has been patchy at best, with unemployment having edged up from the post-pandemic lows, consumption remaining sluggish and exports no longer being the growth driver they used to be.
But there is hope that the economy is gathering some momentum as the S&P Global PMI gauges have been ticking higher during 2024. If there’s a further improvement in the PMIs in April and the CPI report is also strong, the aussie could stage a rebound towards the $0.6500 handle.
However, whilst a move above $0.6500 would eliminate the downside risks, overcoming the 50- and 200-day moving averages, which have converged around $0.6530, as well as the descending trendline at slightly higher at $0.6550 could prove quite challenging.
Alternatively, if the inflation data increases the odds of rate cuts later this year and the aussie breaches the $0.6400 support, attention would turn to the October 2023 low of $0.6268.
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