Today sees the release of the March quarter CPI and it could be a huge day for Aussie dollar traders attuned to the impact of rising inflation on expectations of RBA interest rates.
Looking back a few months, the release of the CPI for the December 2013 quarter was one of the numbers that really turned people’s expectations about the path of Australian interest rates.
Showing a stronger-than-expected rise in inflation and a move toward the upper end of the RBA’s 2-3% band with a print of 2.7% year-on-year, the market reappraised the impact of a lower Aussie dollar and the pressure that inflation heading to or above 3% would place on the RBA.
In many ways it’s a naive view of the RBA’s approach to inflation which its website says is “to achieve an inflation rate of 2–3 per cent, on average, over the cycle.”
Over the cycle! Not a knee-jerk rule that says rates rise if CPI goes over 3%, just managed through the cycle.
In terms of trading, that is a moot point because if traders sense rates are going up then they will put that into the price.
That doesn’t mean the RBA is in a rush to raise rates and often it has left rates on hold when the inflation rate has moved outside its band.
Either way however, today is potentially a huge day for the Aussie dollar, with pundits expecting a print of 0.8% and an acceleration of inflation to a 3.2% year-on-year rate.
The Aussie is in a strong uptrend as the chart above shows and it is also a market that found support at my fast-moving average. So it is a market with a slight upward bias but equally a market that will have two big hurdles today in the CPI and Chinese Flash PMI.
Levels to watch are 93 cents on the bottom after the support at 0.9327 which is the daily fast moving average. Topside, which based on expectations of a rise above 3%, is the key risk – 94 cents, 0.9435 and then 0.9480/90.
And don’t forget, just 15 minutes after the CPI the HSBC China Flash manufacturing PMI for April will be released.