AUD remains rangebound ahead of tomorrow’s inflation report

Inflation rose 6.1% y/y in Q2 and is expected to rise to 7% - which would be its highest level since 1990 and more than twice the RBA’s 2-3% target band. The quarterly read is expected to soften to 1.6%, down from 1.8% - which seems feasible given the newly released monthly CPI read softened slightly to 6.8% m/m from 7% m/m.

However, the RBA pay more attention to the Trimmed Mean and Weighted CPI prints, which are also widely above the RBA’s target. Trimmed mean is expected to rise to a record high of 5.6% yet remain at 1.5% q/q for a second consecutive quarter, whilst the Weighted CPI is expected to rise to 4.8% - its highest level since 2008 – and the quarterly read to rise to 1.5% (1.4% previously).

It is no secret that the RBA were late to respond to inflationary forces seen across the globe – based on the premise that ‘it was different in Australia’. Alas, inflation is here and it is indeed rising. And the RBA expect it to rise further, and estimate 2022 inflation to land at 7.75% before pulling back to around 3% over 2024.

Yet the RBA surprised markets with a mere 25bp hike at their last meeting, and interest rates are just 2.6% which is well below current rates of inflation. Yet during a testimony to the House of Representatives, RBA Governor Lowe pointed out that inflation expectations remain anchored – and it makes more sense to base policy decision on expectations of future inflation over current levels of inflation. For reference, the 5-year breakeven rate is around 2.4% and as the RBS said in their October statement, “Medium-term inflation expectations remain well anchored, and it is important that this remains the case”.

In a nutshell, whilst inflation expectations continue to behave then the RBA are in no rush to hike rates aggressively. Cash rate futures currently imply a 68% chance of a 25bp hike, and have fully priced in a 3% cash rate by their December meeting (although two meetings of 25bp would take rates to 3.1%).

So from a policy perspective, tomorrow’s inflation report is unlikely to change the course of the RBA’s direction. Although if prices come in hotter than expected (like we saw with New Zealand last week) it could send the Aussie higher as it places pressure on the RBA to hike more aggressively. Not that they want to, or likely will anyway - especially as wage growth remains relatively tame compared to inflation.

AUD/USD 1-hour chart:

The Aussie has been confined to a range over the past two weeks. This has made it frustrating for breakout trader, but a delight for range traders. It does not come as a huge surprise that prices have held above the 2020 (close) low, due to the significance of the level. And the longer it holds as support, the higher the odds favour a break higher (in theory). But until we see a decent break of its current range, bears will likely be tempted to fade into rallies into resistance and bulls seek to buy dips around support.

How to trade with City Index

You can easily trade with City Index by using these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.