- The Australian Monthly Consumer Price Index is foreseen at 2.3% in September.
- Quarterly CPI inflation expected below 3%, but core figures are still seen as too high.
- The Reserve Bank of Australia will meet in early November to decide on monetary policy.
- The Australian Dollar could find some near-term demand on higher-than-anticipated CPI readings.
Australia will publish fresh inflation-related figures on Wednesday, kick-starting a row of global first-tier releases that should grant volatility across the FX board. Ahead of the announcement, the Australian Dollar (AUD) fell to a nearly three-month low against the US Dollar (USD), with the latter benefiting from prevalent demand for safety.
The Australian Bureau of Statistics (ABS) will publish two different inflation gauges: the quarterly Consumer Price Index (CPI) for the third quarter of 2024 and the September Monthly CPI, which measures annual price pressures over the past twelve months. The quarterly report includes the Trimmed Mean Consumer Price Index, the Reserve Bank of Australia’s (RBA) favorite inflation gauge.
The RBA will have a monetary policy meeting next week and the outcome will be announced on November 5. The Australian central bank has kept the Official Cash Rate (OCR) steady at 4.35% for roughly a year, and a rate cut remains out of sight.
What to expect from Australia’s inflation rate numbers?
The ABS is expected to report that the Monthly CPI rose by 2.3% in the year to September, easing from the 2.7% posted in August. The quarterly CPI is foreseen to increase by 0.3% quarter-on-quarter (QoQ) and by 2.9% year-on-year (YoY) in the third quarter of the year. Finally, the central bank’s preferred gauge, the RBA Trimmed Mean CPI, is expected to rise by 3.5% YoY in Q3, easing from the 3.9% advance posted in the previous quarter.
Inflationary pressures in Australia are receding after a rough first quarter of 2024 and are now expected to fall into the RBA’s target range of 2% to 3%. Nevertheless, Australian policymakers have repeated multiple times that inflation remains high and would not be sustainable within target for “another year or two.” With that in mind, an interest rate cut before 2025 remains out of the picture.
Easing inflationary pressures, however, should boost the odds for a soon-to-come interest rate trim, particularly considering shrinking growth. The Australian economy has not fallen into recession but it is close to it. Only government spending has prevented the country from suffering a steeper setback. The latest Gross Domestic Product (GDP) showed the economy grew by 0.2% QoQ and by 1.0% YoY in the three months to June.
In September, following the RBA’s latest monetary policy meeting, Governor Michele Bullock noted that while inflation “has fallen substantially since the peak in 2022”, it remains above the RBA’s preferred range of 2% to 3%. Bullock highlighted that underlying inflation was higher at 3.9% over the year to the June quarter. The focus will then be on core CPI as it remains closer to 4% than the magical 3% top goal.
An uptick in price pressures will likely push the odds for an interest-rate cut further away. The hawkish tone of policymakers will reinforce this idea, resulting in a stronger AUD. However, its strength remains doubtful, given the global scenario that keeps pushing investors toward safe-haven assets.
How could the Consumer Price Index report affect AUD/USD?
As previously noted, the RBA will meet next week and announce its decision on November 5. Market participants won’t expect action, but policymakers will acknowledge inflation levels and hopefully hint where they are heading next.
Generally speaking, higher CPI figures will be AUD bullish amid expectations for a persistently hawkish RBA. The opposite scenario is less likely: inflation may ease, but that won’t grant policymakers shifting towards a more dovish stance.
Heading into the CPI release, the AUD/USD pair trades below the 0.6600 mark, down for a third consecutive day.
Valeria Bednarik, FXStreet Chief Analyst, says: “The AUD/USD pair is not done with its slump, and regardless of the AUD’s reaction to the CPI, the risk is skewed to the downside. A recovery post-inflation data release could allow sellers to add shorts. From a technical perspective, the daily chart shows that AUD/USD is developing below all its moving averages. The 20 Simple Moving Average (SMA) heads south almost vertically and is about to cross below a directionless 100 SMA. The 200 SMA also stands flat, providing resistance at around 0.6630. Finally, technical indicators remain within negative levels, although with uneven bearish strength.”
Bednarik adds: “The AUD/USD pair has an immediate support area at around 0.6550, where it posted daily highs and lows between May and July. A break below this region should favor a bearish extension towards the 0.6500 threshold, while once the latter gives up, sellers could target the 0.6400-0.6430 area. Near-term resistance lies at 0.6630, en route to the 0.6670 area. Further gains could result in a test of the 0.6710 area, yet sellers will likely take their chances around it.”
Economic Indicator
RBA Trimmed Mean CPI (YoY)
The Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a quarterly basis, measures the changes in the price of a fixed basket of goods and services acquired by household consumers The YoY reading compares prices in the reference quarter to the same quarter a year earlier. The trimmed mean, which is a measure of underlying inflation, is calculated as the weighted average of the central 70% of the quarterly price change distribution of all CPI components in order to smooth the data from the more-volatile components.Generally, a high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.
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RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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