AUD/USD – Lower than expected CPI raises Rate Cut expectations

Australia Consumer Prices rose lower than expected in 1st Quarter, with prices rising by 2.5% Y/Y as opposed to a 2.8% forecast given by analysts. Q/Q did no better, growing by 0.4% versus an expected 0.7%. RBA recently mention that current inflation rates provide scope for further easing “if necessary”, with inflation coming in lower than expected, does that mean that the scope to ease becomes even wider?

That may not be so straightforward, as headline inflation rates are higher than what previous quarter showed. However, according to RBA’s trimmed mean CPI, after taking out extreme outliers in price fluctuations, inflation rate becomes lower than that of previous quarter. Q1 2013 records 0.3% and 2.2% for Q/Q and Y/Y trimmed mean respectively, compared to Q4 2012 of 0.6% and 2.3%. Delving deeper, CPI Weighted median is mixed, with Q/Q showing 0.5%, lower than previous quarter of 0.6% yet higher on a Y/Y basis, printing 2.6% vs 2.5% previous and higher than expected 2.4%.

Hence looking at the balance of things, it will be highly premature to think that this inflation rate will result in an eventual RBA rate cut.

Hourly Chart

That is not the market’s opinion though, choosing to focus on the headline expectation miss (despite RBA’s inflation target kept between 2-3%), pushing AUD/USD down sharply. Bears will be highly delighted especially those who have entered a few hours earlier trading the structural resistance betting on a bounce lower. Stochastic indicator is also showing a bear cycle, suggesting that further sell-off is possible with a test of Channel Bottom firmly in the cards. Price may still find some interim support around 1.022 swing low, but may accelerate faster towards the Channel bottom should the level be eventually broken.

Daily Chart

Bearish Breakout below 1.03 continues on the daily chart. However, some support can be reasonably expected around 1.02 considering Stoch readings seeking to turn around with current Daily candle managing to remain green despite the bearish CPI data. Of course the inverted hammer is hardly the most bullish response we can have, but certainly it is still an indication that bearish momentum may be slowing down, despite overall bearish pressure remaining.

Looking across the Tasman Sea, New Zealand’s RBNZ has stated that they will not be cutting rates (or raising rates) for 2013. Hence it is strange to see speculation of rate cut increases for RBA despite current inflation rate well within previous scope from which RBA was hesitant about cutting rates. Nonetheless, price may still be looking lower as long as traders and speculators believe in the rate cut hype, but that may not be sustainable in the long run, which again is in line with current technical outlook in which AUD/USD may be heading towards the 100% Fib retracement but finding support around there if the sideways long-term trend remains in play.

More Links:
GBP/USD – Settles Around Key Level of 1.5250
AUD/USD – Rallies Back to Above 1.0250
EUR/USD – Settles Around 1.30

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