Will the RBA continue its tightening moves?
The upcoming Australian CPI release is likely to be the place to look to determine what the central bank’s next moves might be.
Here are points to know if you plan to trade Australian inflation data:
Focus on the event:
Australian Consumer Price Index (CPI) and inflation data for June 2023
When will it be released:
July 26, 2023 (Wednesday), 1:30 a.m. BST
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- Headline CPI YoY: +5.5% expectation vs. +5.6% prior
- Trimming average CPI q/q: +1.1% predicted vs. +1.2% prior
Related data since the last data event/release:
- July RBA Minutes sign to Fixed-service price inflation also reflects high wage growth. And that “Market measures of short-term inflation expectations have regressed from their peak but also remain elevated.”
- Inflation forecasts for June MI It held steady at 5.2% for the next 12 months
- MI inflation measure for June It posted a meager 0.1% month-over-month gain versus a previous gain of 0.9%.
- The RBA Commodity Price Index for June It recorded a decline of 21.5% year-on-year, unchanged from the previous month
- Judo Bank Flash Australia Manufacturing PMI for June: Total input cost inflation remained unchanged from May with higher service cost inflation offsetting a slowdown in manufacturing input price increases. Private sector companies continued to share cost burdens with customers, which led to higher selling price inflation.
- Judo Bank Flash Australia PMI for June: Inflationary pressures in services intensified due to higher demand and higher input cost inflation.
Previous issues and the impact of the risk environment on the Australian dollar
June 28, 2023
Event Results/Price Action:
Australian CPI for May fell from 6.8% to 5.6% y/y versus an estimated decline to 6.1%, leaving most Australian traders off the RBA.
Lower-rated Chinese growth expectations earlier in the week kept the Aussie on weaker footing, along with weaker prospects for additional stimulus by the People’s Bank of China. After all, Chinese Premier Li Qiang has reassured that the country is still on track to achieve the 5% economic growth target in 2023.
However, the Australian dollar managed to rally towards the end of the week when upbeat retail sales data was released, followed by a strong private sector credit report.
Risk Environment and Internal Market Behaviors:
The trading week started with strong risk-off flows carried over from the previous week. It didn’t help that the S&P lowered China’s GDP estimates, keeping safe havens supported, while central bankers still tended to maintain restrictive monetary policies.
Although moves by the People’s Bank of China to set a stronger-than-expected yuan benchmark raised hopes for stimulus and commodity currencies in the middle of the week, stronger-than-expected US data still raised expectations of higher global borrowing costs.
May 31, 2023
Overlay the Australian dollar against major currencies Graphics by TV
Event Results/Price Action:
Australian CPI reading for April showed much stronger than expected at 6.8% y/y vs. 6.3% earlier. Fundamental components revealed that higher transport prices led the inflation report to print its first acceleration since December last year.
Not surprisingly, the Australian dollar had a sharp bullish reaction after seeing the headline numbers since they boosted the RBA’s outlook. However, the commodity currency was forced to regain its ground when China printed some disappointing PMI numbers.
Later, the Australian dollar managed to get back on its feet when RBA President Lowe reiterated their plans to tackle stubborn inflationary pressures. The rally managed to maintain its momentum after China published an upbeat Caixin PMI reading.
Risk Environment and Internal Market Behaviors:
Higher-yielding assets and currencies started the week lower as market watchers were very concerned about the US debt ceiling deal. Adding to the outpourings of risk aversion was China’s downbeat official PMI readings which cast doubt on the country’s economic recovery.
Fortunately for the riskier holdings, market sentiment was much better in the latter half of the week. Several factors, including Fed officials bringing up the idea of a “June halt” and stronger than expected China’s Caixin PMI, motivated risk taking.
Price action odds:
Possibilities of feeling risky: The new trading week begins with the release of global flash PMI readings, mostly disappointing to those looking for signs of a soft landing. Instead, deflationary conditions have worsened in many parts of the world.
The reaction to risk sentiment so far has been mixed, likely due to other market narratives such as a strong rally in oil (possibly on China’s stimulus hopes and tight supply), and strong corporate earnings expectations lifting stocks, but there are signs of risk-off behavior with cryptocurrency and bond yields lower in the session while gold and the US dollar index rose.
This sentiment may hold in the run-up to the Australian CPI release with a lack of major catalysts now and then, but watch out for fresh headlines from Fed officials as this could quickly alter sentiment as we head into the highly anticipated FOMC statement on Wednesday.
Australian dollar scenarios:
Possible base scenario: Market expectations point to an implied figure that’s arguably a slightly lower figure as economic updates contradict what business surveys see.
If we see a slightly lower reading or inline with the previous reading, the general risk sentiment is likely to be the main directional driver for the Aussie after a potential period of higher volatility post-release.
As discussed above, the risk-off sentiment could be in play thanks to disappointing PMIs and risk reduction ahead of the FOMC event, which increases the odds of Australian traders being bearish if this scenario plays out.
In this case, look for a possible move for the Aussie against the “safe haven”/lower yielding currencies; Settings against the Japanese Yen and Swiss Franc make more sense for short-term play at the moment.
Possible alternative scenario: Another surprise on the CPI rally is the possibility given the sentiment from business surveys, and could raise bets on another 0.25% rate hike from the RBA in its upcoming policy statement, which could have traders on edge about slowing growth as a result.
If risk aversion is in play around the CPI release (barring a big surprise to the upside in the CPI data), look for potential short positions for the Australian dollar against safe-haven or lower-yielding currencies like the Japanese yen and the Swiss franc after the initial surprise reaction and fading volatility. But if the risk sentiment is positive, check AUDCAD, as the Canadian dollar has been well supported by the recent rally in oil prices (but be aware that the EIA Oil Inventories data could influence the Canadian dollar and oil in the short term).
Also, remember to remain alert and/or quickly adjust your risk management plan as the market is likely to shift focus to the FOMC release later in the Wednesday session, an event that has the potential to turn the entire market upside down.