Crucial CPI Data May Prompt RBA Action

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  • The Australian Dollar bounced higher last week on US dollar weakness
  • The latest CPI re-accelerated and created a headache for the RBA
  • If the RBA is serious about fighting inflation, will it raise AUD/USD further?

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The Australian Dollar was strengthened during the week due to a combination of a weaker US Dollar and a stronger than expected local CPI reading.

The US Dollar has seen some weakness due to the market looking for an end to the ever-falling Federal Reserve.

Treasury yields dipped after the Bank of Canada (BoC) raised its overnight lending rate by 50 basis points (bps), short of the 75bp forecast. At the beginning of the month, the RBA also took a bow when they raised the cash rate by 25 bps instead of the 50 bps expected.

This change in pace from other central banks had the market hoping for an end to the Fed’s uber-hawkish stance. This perception of a possible pivot on their monetary policy tightening regime saw Treasury yields slide a bit lower, undermining the US dollar.

On the domestic front, Australian CPI came in warmer than expected last Wednesday. Of particular concern is the increase in the RBA’s preferred measure – the so-called “clipped mean”. Australian Commonwealth Government bond (ACGB) yields soared on the shock numbers but eased into the weekend in tandem with Treasury yields.

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Headline CPI was 7.3% year-on-year by the end of the third quarter instead of the 7.0% forecast. The trimmed average measure was 6.1% over the same period, rather than the 5.5% predicted.

The RBA said they expected inflation to reach 8% at the end of this year before tapering off in 2023. A problem for this scenario is retargeting as shown in the quarterly breakdown.

The focus here is the trimmed average quarterly number, which jumped to 1.8% quarter-over-quarter for Q3, versus 1.5% from the previous quarter.

There will be a change in the reporting of the CPI data point going forward, whereby the Australian Bureau of Statistics (ABS) will provide a monthly update between reports of the quarterly figure, which remains the key inflation gauge.

Those monthly readings will include 62-73% of the basket that is used to measure the quarterly figure. More information can be found on the ABS website here.

In the region, China continues to pose problems for Australia as growth there is starting to look a little anemic following the Chinese Communist Party congress last week.

President Xi Jinping removed several senior members from the leadership group and replaced them with his loyalists. The worry for markets is that ongoing ongoing Covid-related lockdowns and shutdowns across multiple industries look set to continue.

Hong Kong’s Hang Seng Index (HSI) is at its lowest level since 2009, reflecting the worrying scenario.

While the Melbourne Cup will be run and won this Tuesday, the focus for Australian financial markets that day will be the RBA’s rate decision. A key question remains around their commitment to lower the accelerating inflation to avoid a policy mistake that other central banks have made and are now looking at jumbo hikes in monetary rates.

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— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel through @DanMcCathyFX on Twitter



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