AUD bulls were at last given some hope this week as Australian CPI finally reached the RBA’s 2% target. CPI for the March quarter rose 0.52% to mark an annual reading of 1.98%. This was well above the median forecast of 1.85% and well above the RBA’s own projection of 1.75%, forecast in February, expected to run through to mid-2019. AUD under heavy selling pressure over the last few days and while the data was positive we only saw some minor buying on the day before selling kicked in once again.
Core Inflation Pickup Continues
The recovery in core inflation off the late 2016 lows of 1.5% is still continuing. With both headline and core inflation rising, expectations for an RBA rate hike later in the year remain intact. Indeed, the release of the recent RBA minutes showed that while timing is still hotly debated, policymakers now agree that the next move in Aussie rate will be up, a view that has been stated before by the RBA governor.
Conditions Have Improved Since November SoMP
It’s worth considering that the RBA’s February Statement on Monetary Policy (SoMP) growth and inflation projections were both premised on conditions at the time with AUDUSD at 0.78, TWI at 64 and Brent Oil at 64. AUDUSD is now at 0.76, TWI is 62.6 and Oil is 75 which is a supportive combination for the inflation outlook. Indeed, this unexpected inflation reading gives the RBA a higher starting point for its next set of projections at the upcoming May 4th SoMP and presents upside risks for the new projections.
The last monthly trimmed mean inflation reading of 2.1% YoY in March gave a good guide for this reading and the next monthly update due on April 30th, ahead of the SoMP, is going to be closely watched by traders keen to see if the weaker AUD has started to boost tradable goods inflation.
Market Pricing A November Hike
Current market pricing is for a November rate hike by which time the RBA will have received two further inflation reports (July and October) as well as two further wage reports (May and August). So clearly now all focus will be on these incoming data reports. Solid prints will encourage the market view that the RBA will raise rates in November, keeping AUD supported, while any weakness will seen November rate hike pricing reduced, causing further weakness in AUD.
Positioning data in AUD tells the story of a market that has been consistently eager to build AUD upside. With the general tide of hawkishness sweeping across the G10 central bank bloc, traders have been of the school of thought that the RBA will follow suit sooner rather than later. With this in mind, any positive data or positive RBA commentary has fuelled a bid in AUD. However, bulls have been continually disappointed with dovish comments causing volatility in positioning and a lack of direction in price action.
The recent sell off in AUDUSD has seen price breaking down below the rising long term trend line from the 2016 lows, moving within the short term bearish channel which has framed price action over the last few months. While price remains below the long term bullish trend line, focus will be on run down to deeper support at the .7498 level which is the late 2017 low. A break back above the .7638 level will be needed to assuage downside pressure.