Despite the concerns about the potential economic impact from the wildfires and the spread of the coronavirus, the Australian Dollar has been moving higher this month.
The data coming out next could give that trend a further nudge, and put an end to speculation of a rate cut by the RBA.
Data reports over the last week have been confirming what some saw as green shoots in at the end of last year. Employment came in above expectations, and manufacturers expressed more optimism about the future than expected.
The surprise drop in unemployment might be followed by a jump in inflation. Therefore, this removes the two reasons the RBA has given for a rate cut.
There are several measures of CPI that come out at the same time. And they each have different effects on the market.
On the one hand, we have the standard measure of inflation. This is the one that most decision-makers follow. It has a direct impact on consumer sentiment and other economic factors.
The second is the RBA Trimmed Mean CPI. This is the preferred measure that the central bank uses when defining its policy. They feel it better reflects the long term trend.
It should be noted that the bank’s mandate to maintain price stability doesn’t specify which measure of CPI they are required to consider. Policy, therefore, can and is routinely influenced by the traditional measure of inflation.
What We Are Looking For
For the fourth quarter, expectations are for Australia’s CPI to come in at 0.5%. This in line with the prior quarter’s 0,5%.
A result like this would imply that the annualized inflation rate would be 2.1%, compared to 1.7% in the prior measurement. This is important because it’s over the RBA’s target of 2.0% long term inflation.
As for the quarterly Trimmed Mean CPI, we can expect that to come in at 0.4% also a repeat of the prior measure of 0.4%. On an annualized basis, that would bring it to 1.5% and slightly lower than the 1.6% prior.
Still not at the RBA’s target, but also not moving away. The potential cost of moving closer to unconventional measures would seem less appealing if inflation is at least holding its ground while other data improves.
On the other hand, some of the reasons for the increase in inflation might not be long-lasting. Fuel prices, for example, have been falling since last quarter due to the expected drop in demand from the spread of the coronavirus.
Another factor could be self-fulfilling. The lower AUD last year helped support the increased prices of imported goods. But if the strengthening trend continues, that could reverse.
If the RBA doesn’t signal that low rates are here to stay for a while if not continue to suggest further cuts, the AUD could rise and undercut the bank’s efforts to boost inflation.
Increased inflation, especially above expectations, would likely support the AUD as we can expect potential action by the RBA to be postponed. However, a disconnect between the CPI and trimmed CPI could lead the RBA to continue to consider a rate cut even with higher inflation. Therefore, support for the AUD wouldn’t be as much.
And, if the data misses expectations, the currency could return to a descending pattern.