Today’s inflation figures show that seasonally adjusted CPI fell to 5.8% from 6.8%, versus 6.1% expected. With the annual rate falling at -1.2 percentage points on the month, it is the fastest pace of disinflation in Australia in nearly two years. And that must come as a huge relief for the RBA board, even if it does remain high by historical standards.
Housing inflation continues to decelerate on an annual basis whilst clothing and footwear actually deflated. Rents continue to rise, although its pace is steadying. On a month over month basis, prices stood still at 0% and momentum has trended lower since over the past four months.
And with both inflation for Canada and Australia undershooting expectations over the past 12 hours, it brings hope that US core PCE data could follow on Friday.
What does this mean for the RBA’s next interest rate decision?
The RBA are set to announce their next monetary policy decision on July 4th. Cash rate futures implied a 77% chance that the RBA could hold rates at 4.1%, and today’s inflation figures are unlikely to see a flurry of fresh hawkish bets placed who had already decided it would be a hold.
Personally, I think the odds of a hike are higher than the 23% probability cash rate futures imply. Inflation is still too high by historical standard, and even at 5.8% is still nearly three times higher than the upper range of their 2-3% target band. Employment remains strong and there are growing concerns that services inflation will remain sticky (as it has done everywhere else). Even if the RBA pause, they’re unlikely to tone down their hawkish message as it remains important to the RBA that ‘inflation expectations remain well anchored’. It’s also plausible that the current RBA governor may want to hike one last time on what could be his last meeting, with the government expected to announce either a new governor or reappoint Governor Lowe in July. Either way, the decision between a pause or a hike could be more finally balanced than markets are currently pricing in.
AUD/USD 15-minute chart:
AUD/USD fell just over 1% following the inflation report (~70 pips) before finding support around a 61.8% Fibonacci ratio from the June high to low. We can see on the 15-minute chart that prices fell hard and fast through 0.6650 as algos had a field trip, which left the obligatory liquidity gap which prices are now trying to fill. Yet as traders across Europe and the US are yet to react, we suspect there may be another leg lower for AUD/USD.
At the time of writing, AUD/USD has pulled back to a 38.2% Fibonacci ration near the daily S2 pivot point. From here, we’d like to see more evidence of a swing high forming, but ultimately the bias remains bearish beneath the 0.6660 (which is just above the previously mentioned liquidity gap). The initial target are the lows around the daily S3 pivot point, a break beneath which brings the 66c handle into focus.
-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
