Weak Australian CPI to Spur AUD/USD Selloff?

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Fundamental Analysis: Forex Trading Review - May 8, 2014

Earlier in today’s Asian trading session, Australia printed a weaker than expected quarterly CPI figure of 0.6% versus the estimated 0.8% increase in price levels. The trimmed mean CPI, which excludes 30% of the most volatile items, came up with a mere 0.5% uptick instead of the projected 0.7% rise. This places the annual inflation figure still within the central bank’s 2-3% target range.

With that, hopes of an RBA (Reserve Bank of Australia) rate hike for the year were dashed. Aussie bulls were disappointed to find out that the Australian central bank is likely to stick to its neutral monetary policy stance for now, with no rate changes for the rest of the year. Analysts predict that the rate hike isn’t likely to happen until 2015.

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Australian CPI and the AUD

AUD/USD sold off by close to 50 pips during the release of the bleak quarterly CPI report, followed by a test of .9300 in the minutes the followed. Other Aussie pairs also saw weakness, with EUR/AUD surging past the 1.4850 level in the Asian session.

Apart from the lower likelihood of a rate hike in the near term, another reason for the sharp AUD selloff following the subdued CPI release is the speculation that the currency’s gains may be partly to blame for the slowdown in inflation. After all, currency appreciation does have a downward effect on price levels. Another weaker than expected CPI report in the current quarter might lead the central bank to jawbone the currency.

Bear in mind that the RBA has already expressed its concern about the historically high levels of the Australian dollar. Officials pointed out that this weighs on export demand, as this makes Australian products relatively expensive in the international market. As an export-dependent economy, Australia cannot afford to see a huge drop in export trade.

To contact the reporter of the story: James Brennan at james@forexminute.com