Australian Dollar Forecast: Firm CPI Keeps November RBA Hike in Focus
The Australian Dollar held above US 70 cents after firm inflation data reinforced the case for an RBA hike, although stronger US rates could limit gains.
The Australian Dollar to US Dollar exchange rate was little changed at $0.7035 on Wednesday after Australian inflation figures offered little relief to policymakers weighing another interest-rate increase.
Euro to Australian Dollar (EUR/AUD): 1.582541 (0.00%)
The Australian Bureau of Statistics reported quarterly trimmed-mean inflation of 1.0% in the September quarter, compared with the Reserve Bank of Australia’s (RBA) 0.8% projection cited by Crédit Agricole before the release.
That leaves the result consistent with the bank’s argument that only a substantial downside surprise would prevent a hike at the 3 November meeting.
Underlying inflation remains the difficult part
Headline prices rose 1.3% over the quarter.
The trimmed mean reduces the influence of unusually large price movements, helping policymakers assess pressure beyond volatile items such as fuel.
Ahead of the figures, Crédit Agricole’s David Forrester wrote: “Headline inflation will be pushed higher by a further rise in fuel prices leaving the market and the MPB to focus on the trimmed mean measure of inflation.”
“The current consensus is for trimmed mean inflation to come in at 1.0% QoQ and 3.6% YoY, significantly above the RBA’s 0.8% QoQ and 3.3% YoY forecasts for Q3.”
The quarterly result matched that consensus rate of increase and was close to Goldman Sachs’s own pre-release estimate of 0.95%.
Annual trimmed-mean inflation in the quarterly series was 3.7%, above the 3.6% consensus cited by Crédit Agricole.
RBA Governor Michele Bullock also stressed the domestic element in Wednesday’s parliamentary opening statement.
Referring to global cost pressures, she said: “While they are certainly compounding the inflation problem, we still see inflation arising from domestic capacity pressures.”
Labour-market weakness may not be enough to delay action
Forrester had interpreted recent official comments as a strong signal to act: “Public appearances by RBA Deputy Governor Andrew Hauser and Assistant Governor and Chief Economist Sarah Hunter have clearly signalled that the internal recommendation of the RBA to the MPB will be to hike rates next week.”
“We think it would take a significant downside surprise in the inflation data to see the RBA hold off raising rates.”
“While the unemployment rate at 4.7% is 20bp above the central bank’s forecast, it is well within the standard forecast error, and changes to the ABS survey have raised some doubts about the data. Other data also suggests that the labour market is only gradually loosening.”
The distinction is between some easing in demand for workers and enough spare capacity to bring inflation sustainably back towards target.
That was also the issue behind Goldman’s earlier switch from a November hold to a hike forecast, when it identified pressure on productive capacity despite softer employment data.
Goldman also cautions against the amount of tightening priced across global markets: “Across the board, our strongest global view remains that central banks will deliver fewer hikes than priced.”
The US Dollar still has sources of support
Crédit Agricole’s Valentin Marinov identifies the energy shock and renewed strength in US technology shares as support for the American currency.
Before Wednesday’s Fed decision, he wrote: “These drivers could continue to prop up the USD, especially if they also pave the way to a ‘hawkish hold’ from the Fed on Wednesday.”
That leaves the Federal Reserve’s guidance relevant even after Australia’s inflation release, particularly if it encourages expectations of further US tightening.
What This Means for AUD/USD
The inflation outcome removes little of the pressure on the RBA to act in November. Further support from rate expectations would depend on investors becoming more positive about Australian returns relative to those in the US.
A hike accompanied by restrained guidance could offer less support than the higher cash rate alone suggests.
The RBA also has to weigh the drag from expensive energy on household spending. Its November assessment of that trade-off will help determine whether investors expect more tightening after the next meeting.
