The Australian dollar is powering higher as US inflation data whiffs

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The Australian dollar has opened the new trading week just under US 79 cents, consolidating upon the significant gains achieved on Friday following the release of yet another weak US inflation report, this time for September.

Here’s the Aussie dollar scoreboard as at 8am AEDT.

AUD/USD 0.7882 , -0.0006 , -0.08%
AUD/JPY 88.1 , 0.03 , 0.03%
AUD/CNH 5.1769 , 0.005 , 0.10%
AUD/EUR 0.6669 , 0.0011 , 0.17%
AUD/GBP 0.5925 , 0.0011 , 0.19%
AUD/NZD 1.0985 , 0.0002 , 0.02%
AUD/CAD 0.9825 , -0.0007 , -0.07%

After opening Friday’s session at .7819, the AUD/USD ground higher over the course of Asian and European trade before jumping to a more that two-week high following the release of the US inflation data for September.

Core consumer price inflation (CPI) — that which excluded movements in energy and food prices — rose by 0.1%, missing expectations for a larger increase of 0.2%.

As Ray Attrill, Head of FX Strategy at the National Australia Bank explains, that continued a long run of underwhelming US inflation prints, casting doubt over the need for further interest rate increases from the US Federal Reserve.

“It’s now six from seven in terms of core US CPI undershooting expectations,” said Attrill in his morning note. “So core CPI rose by just 0.7% in the past six months, or 1.4% annualised.”

Attrill says that despite the weak inflation report, market pricing for a December rate hike from the US Fed only fell marginally, something that he put down to remarks from Fed chair Janet Yellen during the session.

The surprise on Friday was perhaps that pricing for a December Fed rise didn’t come down more. It slipped by only about 4% to 73% using Fed Funds futures,” he said.

“Fed chair Janet Yellen spoke in Washington… saying that ‘my best guess is that these soft readings will not persist, and with the ongoing strengthening of labor markets, I expect inflation to move higher next year. Most of my colleagues on the FOMC agree’.”

The US dollar may have also garnered some support from a solid US retail sales report for September which net-net came in slightly ahead of expectations, along with news that US consumer confidence hit a 13-year high, according to the University of Michigan survey.

“The unexpected strength of the early October Michigan consumer sentiment reading and slightly better than expected core retail sales data was part of the story behind the USD recovery,” Attrill said.

However, while that helped to support the greenback against the likes of the euro, it was not enough to curb continued gains in the Aussie during the session.

The AUD/USD briefly hit .7897, leaving it at the highest level since September 26. A strong rebound in iron ore prices, Australia’s largest goods export by dollar value, may have also underpinned the Aussie’s gains.

AUD/USD 30-Minute Chart

Turning to the session ahead, the Aussie’s movements look set to be dictated by speculation over the prospect of US tax reforms and the outlook for the Chinese economic growth.

“AUD/USD is vulnerable to more upside this week underpinned by encouraging Chinese economic activity,” says Elias Haddad, senior currency strategist at the Commonwealth Bank.

“Leading indicators suggest China’s economy will likely grow at an annual pace of 6.8% in Q3 driven by steady consumption and investment.”

China’s Q3 GDP report is slated for release on Thursday, one day after the start of China’s 19th National Party Congress on Wednesday.

Haddad says the other big driver this week will be any news on the outlook for US tax reforms.

“There are no policy relevant US economic data release but progress on US tax reform can offer USD some support,” he says. “The Senate Republicans are expected to put their 2018 budget resolution to a vote on Monday.”

Despite the prospect of tax reform, Haddad says that “muted US inflation pressures will continue to weigh on US interest rate expectations, and limit USD upside”.

On the data docket today, China will release consumer and producer price inflation figures for September at 12.30pm AEDT.

CPI is tipped to have grown 1.6% over the year, down from 1.8% in August and around half the annual pace targeted by the People’s Bank of China, while PPI is expected to remain steady at 6.3%.

Outside those releases the Asian calendar has few market-moving events scheduled, likely ensuring that movements in the Chinese yuan and Japanese yen against the dollar, along with those in Chinese commodity futures, will be influential on the Aussie.

Later in the session, data highlights include trade data from the Eurozone and the New York Fed manufacturing index from the US.

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