AU Inflation Shocker Sends Aussie Tumbling

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Market Drivers April 27, 2016

AU CPI misses big
UK GDP in line – relief for cable
Nikkei -0.04 Dax -0.58%
Oil $44/bbl
Gold $1246/oz.

Europe and Asia:
AUD AU CPI -0.2% vs. 0.2%
GBP UK GDP 0.4% vs. 0.4%
GBP UK Index of Services 0.7% vs. 0.8%

North America:
USD Pending Homes Sales 10:00
USD FOMC 14:30

Australian inflation data came in much cooler than expected sending Aussie tumbling by more than a penny and half in Asian and early European dealing.

Australian inflation printed at -0.2% versus 0.2% eyed with Trimmed Mean data coming in at 0.2% versus 0.5% expected. On a year over year basis CPI stood at 1.3% versus 1.7% forecast well below the RBA’s 2% target.

The news sent Aussie towards the 7600 figure as traders started to anticipate a rate cut by the RBA in May. The shockingly low inflation figures certainly provide scope for further easing by the RBA, but the data in Q1 may have been skewed by the stronger Australian dollar and the very low oil prices. With oil now trading at $45/bbl having rebounded by 60% off its lows the one off effects of lower energy costs should begin to disappear in Q2 data. Furthermore AU final demand has not declined dramatically over the past few months and that factor may carry much more weight with RBA at it next meeting in May.

Generally the RBA is reluctant to cut rates at this time as economic conditions Down Under remain steady and policymakers are likely to wait for the situation to become more acute before doing any additional easing. The one variable that could sway them to cut would be the AUD/USD exchange rate. If Aussie continues to rise over the next few weeks towards the 8000 figure, the deflationary impact of such strengthening currency could compel the RBA to lower the benchmark rate by another 25bp to clear out all the speculative carry trade flows that have been flocking to the pair.

In UK the GDP data printed in line at 0.4% versus 0.4% eyed providing relief to cable bulls who feared that all of the Brexit talk would slow down economic activity. So far, according to the ONS, that has not been the case. However GDP data carries a significant drag and most recent data points out of UK have shown significant slowdowns. Today’s CBI Reported Sales report turned negative for the first time in more than three years.

For now cable has been blissfully ignoring the weak data sets as markets only preoccupation is with the Brexit vote. However with the pair having rallied nearly 1000 points off the lows, much of the positive news is already factored in. Meanwhile the 1.4600-1.4700 corridor should prove to be a much bigger resistance point going forward so the pair may be due for a correction over the next few days.

Lastly the focus today of course will be on FOMC, with the Fed walking a very fine line of trying to maintain its credibility while at the same time trying to support the sputtering US recovery. US economic data has clearly deteriorated over the past few weeks with Housing and Durable goods only the latest points to show a slowdown in momentum. That’s why it will be interesting if the Fed even lays down the foundation for a rate hike in June of course qualifying the statement with “data dependent” clauses. If the Fed offers no hint of any tightening to come the dollar could take another pounding today with USD/JPY once again returning to the 110 level.

Boris Schlossberg
Managing Director

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