Inflation data for the third quarter is due out of Australia on Wednesday (0030 GMT) and will be watched closely as it could determine whether the Reserve Bank of Australia will decide to cut interest rates again next month. The RBA cut interest rates for the third time in October and so tepid inflation numbers would indicate the Bank is far from done in its easing cycle. Any disappointing reading is bound to drag on the Australian dollar, which is on a bumpy rebound from 10-year lows.
Australian CPI stuck below RBA target
Australia’s consumer price index (CPI) has been stuck below the RBA’s 2-3% target band for much of the last five years, rising inside the band in two quarters only. The annual rate of CPI is forecast to have inched up slightly from 1.6% to 1.7% in the three months to September. On a quarterly basis, inflation is forecast to have risen by 0.5%, decelerating somewhat from the prior quarter’s 0.6% rate.
The RBA will also be keeping a close tab on underlying measures of inflation, specifically, the weighted mean and the trimmed mean. At 1.2% and 1.6% year-on-year, respectively, both the weighted and trimmed mean CPIs are uncomfortably below the central bank’s target. The weighted mean is forecast to have inched up slightly to 1.3%, while the trimmed mean is expected to have held steady at 1.6% in the third quarter.
Underlying inflation eyed for rate clues
Any further weakness in underlying inflation in the past quarter would keep the door open for the RBA to cut rates again in the coming months, maybe as early as December. Rate cut expectations both in Australia and globally have been pared back during October as easing trade tensions between the United States and China have helped lift some of the gloom hanging over the outlook.
The shifting expectations have spurred a rebound in the Australian dollar, aiding recovery from 10-year lows it plumbed at the beginning of October. The odds of an end of year rate cut have fallen from about 80% to around 40% currently. Those odds could decline further if the CPI report shows an uptick in inflationary pressures as it would suggest inflation is headed in the right direction, casting doubt on the need for further monetary easing.
Aussie on the up in October
If inflation rises more than expected, AUD/USD is likely to overcome immediate resistance at the 50% Fibonacci retracement of the July-October down move at 0.6875 to next challenge its 200-day moving average near 0.6965.
However, in case of yet more subdued inflation numbers, a rate cut bets could shoot up again, which could push AUD/USD below immediate support at the 38.2% Fibonacci at 0.6826. A drop below this level is likely to see the pair next seek support from the 23.6% Fibonacci at 0.6766.
No change expected by RBA in November
As far as the next meeting in November is concerned, however, the RBA is almost certain to keep rates unchanged and the question to ask will be whether the latest inflation data will keep policymakers on an easing path, or will they signal a pause. In recent remarks, Governor Philip Lowe appeared to suggest another rate cut is far from certain and warned of the risk of low-interest rates on asset prices.
All trading involves risk. It is possible to lose all your capital
This information is not considered as investment advice or investment recommendation but instead a marketing communication. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.