The Australian dollar has had a particularly volatile couple of hours, with currency traders split on how today’s CPI and PMI data will affect the likelihood of an August cash rate cut by the RBA.
The AUD spiked up to $US0.9316 shortly after the ABS’ 11.30am release of June CPI figures. The AFR’s Phil Baker reported that the market put the likelihood of an August rate cut at 50%, down from a pre-CPI 65%.
HSBC’s China PMI came out 15 minutes afterwards, sending the AUD as low as $US0.9248, before recovering to about $US0.9260, which is still about 30 pips below where the AUD was trading early this morning.
Via investing.com, here’s what happened:
HSBC economists Paul Bloxham and Adam Richardson expect an August rate cut, explaining that business and consumer sentiment has been weak, unemployment is up, and the 0.4% CPI is low enough to allow for a cut.
Westpac senior economist Justin Smirk agrees that inflation “should not stand in the way of an RBA cut should the Bank agree with our view that the real economy is in need of further stimulus”.
Here’s what Smirk has told investors:
Given the critical importance of CPI for the outlook for monetary policy in Australia, FX markets were acutely focussed on the release and therefore liable to sharp swings in sentiment. Today’s release certainly lived up to high expectations. The initial 0.4% headline saw AUD drop sharply to a low of 0.9244. However, the weighted median saw a just as sharp recovery and a break above the all important 0.9300 level to hit a high of 0.9320. China flash PMI was released 15 minutes after CPI which saw another sharp swing lower to touch the lows seen immediately after CPI.
The market has been quite down-beat on China for sometime now, so the market skew ahead of today’s data is likely to have been for a soft result. Hence this, along with some positives within the detail of the PMI survey may limit the fallout for risk currencies like the AUD and USD/Asia bloc over the coming few sessions. However, price action has clearly highlighted that 0.9300/0.9350 is a major resistance level for the AUD. We still see short term risks to the upside given market sentiment/ positioning. However, a clean break of this level after today’s data will be difficult.
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