Australia Monthly Consumer Price Index to be crucial for RBA decision – Crypto News – Crypto News
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Australia Monthly Consumer Price Index to be crucial for RBA decision – Crypto News

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  • The Australian Monthly Consumer Price Index is forecast to rise 5.2% YoY in August, up from the 4.9% increase recorded in July.
  • CPI inflation is expected to show its first reacceleration since April.
  • Soaring petrol prices in Australia are likely to push inflation higher.

The Australian Monthly Consumer Price Index (CPI) inflation data for August will be published by the Australian Bureau of Statistics (ABS) on Wednesday at 01:30 GMT. The data could be critical for the Australian Dollar (AUD) and the Reserve Bank of Australia (RBA), which will hold its October monetary policy meeting next week. 

Inflation in Australia (AU) peaked in December 2022, when the Monthly CPI showed an 8.4% year-on-year increase. Since then, it has been trending lower, with only a rebound observed in April. Last month, the inflation number surprised with a lower-than-expected reading, reinforcing the expectation that the RBA would maintain interest rates unchanged in September as it did. Another soft reading looks unlikely in August as  petrol prices have risen considerably, leading experts to anticipate a potential reacceleration in inflation.

What to expect from Australia’s August inflation rate?

A rebound in the inflation rate in Australia in August could increase the expectation of another rate hike from the RBA, although not necessarily at the upcoming meeting next week. The quarterly Consumer Price Index remains the most important measure of household inflation. Since the monthly data is derived from the available data from the quarterly CPI, a rebound in August is likely to anticipate a hotter Q3 CPI reading, which will be released on October 25.

The market does not favor a rate hike at the October 3 meeting, which will be Michele Bullock’s first meeting as a Governor. The expectation for a rate hike increases for the November and December meetings. According to Bloomberg’s World Interest Rate Probability (WIRP), the odds of another rate hike rise to 85% for the first quarter of next year. Interest rate futures indicate that the market expects the cash rate to peak around 4.55% in the first quarter of 2024, higher than the current 4.10%.

An analyst at TD Securities explained that a significant upside surprise in the monthly CPI “adds scrutiny to the Q3 CPI printout in late October. “We can’t discount the odds of an insurance hike in November, especially given the risk of an inflation resurgence after the march higher in commodity and energy prices.”

If the Consumer Price Index shows inflation not slowing down and, on the contrary, accelerating further above the 2%-3% target range, the Australian Dollar could receive a boost as markets would consider further tightening ahead. However, if the Monthly CPI comes in below expectations, it could hurt the Australian Dollar, but it will be positive news for the Australian economy.

When will the Monthly Consumer Price Index report be released, and how could it affect AUD/USD?

The Monthly Consumer Price Index inflation data for August is scheduled to be published at 01:30 GMT on Wednesday. Since August, the AUD/USD pair has been trading within a range between 0.6500 and 0.6350, reaching the lowest levels of the year. The pair’s decline can be attributed not only to a weaker Australian Dollar but mainly to a stronger US Dollar driven by higher Treasury yields and the strong performance of the US economy. The CPI figures could have a limited impact on the pair, particularly if they come in line with expectations. A significant surprise in the data may be required for the AUD/USD to approach the limits of the current range or even break out of it.

Expectations of another rate hike from the RBA could potentially boost the AUD/USD pair in the near term. However, it is unclear how long-lasting the impact would be. The combination of higher inflation and monetary tightening at a time when the economy is facing challenges may limit the upside potential for the Australian Dollar and could ultimately have a negative impact.

The AUD/USD pair is following a bearish trend, finding support around the 0.6350 area, while the rebound has been limited around the 0.6500 area. The future direction of the pair largely depends on a consolidation outside of these two levels. A convincing break above 0.6500 could open the doors to a more sustainable appreciation, but it would likely require improvements in economic data and a positive outlook for China.

On the contrary, negative market sentiment and a worsening economic outlook could continue to put pressure on the pair around 0.6350, and a break below this level could lead to a downward acceleration, targeting 0.6300. The next medium-term support level stands at the 0.6260 zone.

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

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