Australian CPI printed markedly cooler than expected rising just 0.2% in the final three months of the year versus forecasts of 0.4%. The trimmed mean figure was also lower 0.6% versus 0.7% eyed. The biggest price rises of the quarter were in the communication and insurance and financial services sectors but they were were offset by falls in the cost of healthcare, furniture and food and drinks.

The very low price pressures in the Australian economy left plenty of scope for RBA to consider another 25bp rate cut at its next meeting in February, but the markets has assigned only a 34% chance probability that central will do so. One of the reasons why few market participants expect the RBA to act is the relatively steady pace of growth in China and the US which should keep global demand steady for the foreseeable future.

Nevertheless, the latest inflation news along with the weak labor data suggests that final demand in Australia has slowed significantly and will likely result in lower growth Down Under in Q1 of this year. Such a trend should keep pressure on RBA to ease further and will keep any rally in Aussie contained as the interest rate differential with the rest of the G-20 will continue to compress.

The AUD/USD fell in the aftermath of the release and remained near the lows of the day but the drop was not dramatic and the pair stayed well above the 1.0500 barrier. However, further liquidation on the yen crosses and another wave of risk aversion once Europe comes on line could push the pair to test that barrier as the day progresses. The Aussie has been contained in a very tight trading range of 1.0500-1.0600 for the past week, but the slew of negative economic data from Down Under suggests that the downside part of that channel is much more vulnerable to a break than the upside.

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