AUD soars as China’s inflation drops

The Australian dollar has posted sharp gains today. In the European session, AUD/USD is trading at 0.6837, up 1.27%.

China inflation falls unexpectedly

China’s economy has been stalling, as global demand has weakened and China rigorously enforces a zero-Covid policy. The slowdown in the Chinese economy has hurt global growth, but the silver lining is that August inflation also dropped, which has taken the edge off global inflation. China is a key driver of external inflation pressures, and the decline will be welcome news in the major economies, where inflation remains enemy number one and has led to a sharp tightening in policy.

China released the August inflation earlier today. On an annualized basis, August CPI was up 2.5%, lower than the 2.7% gain in July and below the consensus of 2.8%. The Producer Price Index for August slowed to 2.3%, down from 4.2% and below the estimate of 3.1%. The drop in CPI in the world’s number two economy has raised risk sentiment and sent risk-related currencies like the Aussie sharply higher today.

The RBA raised rates by 0.50% earlier this week, bringing the cash rate to 2.35%. RBA Governor Lowe said on Thursday that the RBA would need to raise interest rates at least twice more to contain the “scourge” of inflation. Lowe reiterated that the pace and extent of future rate hikes would be data-dependent, especially inflation and wage growth. After four straight hikes of 0.50%, the RBA may decide to ease up in October with a small hike of 0.25%. Next week’s employment report will be an important factor in the RBA’s rate decision.

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AUD/USD Technical

• AUD/USD is testing support at 0.6737. Below, there is support at 0.6661
• There is resistance at 0.6737 and 0.6846

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