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The RBA can breathe a sigh of relief

Updated -  Apr 23, 2014 12:16:16 AM By Chris Tedder



It turns out that inflation in Australia isn’t running as hot as the market had previously anticipated, which is good news for the Reserve Bank of Australia (RBA). The RBA has made it very clear that it prefers to remain on the sidelines in the near-term and let prior easing find its way into the real economy. Another very strong inflation reading for last quarter (Q4 inflation rose 0.8%) would have cast doubt over the bank’s plans by possibly forcing it to raise interest rates sooner than the board would have liked.

The figures

Consumer prices rose 0.6% q/q and 2.9% y/y, missing expected increases of 0.8% and 3.2% respectively. Trimmed mean and weighted median CPI also missed expectations, rising 0.5% q/q (2.6% y/y) and 0.6% q/q (2.7% y/y) respectively. The two measures of core inflation suggest that underlying inflation now stands near the top end of the RBA’s target range of 2-3%, but not as high as the market was expecting prior to the release of Q1’s figures. It’s worth noting that the bank has previously stated that it expects inflation to remain around the top of its target range for the time being.

Inflation isn’t running too hot for the RBA

The data suggests that inflation isn’t running hot enough to be an immediate concern to the RBA, meaning the bank can securely keep interest rates at a record low 2.5% in the near-term. This is in line with our forecasts, but there were some in the market that were banking on stronger inflation to cause the RBA to hike interest rates sooner than expected. The resulting sell-off in the Australian dollar saw AUDUSD plummet around 100 pips at its lowest level today.

AUDUSD

AUDUSD smashed through 0.9300 shortly after the data was released. The bears gave the commodity currency a brief moment of peace after a private sector survey pointed towards a lift in sentiment in the heart of China’s economy. HSBC’s China Flash Manufacturing PMI reading for April jumped to 48.3 from 48.0. Yet, this was largely expected by the market, hence the bears soon took control of the pair again. From here, there is an important support zone around 0.9200 (see chart).

Source: FOREX.com

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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