Early tomorrow, or late tonight depending on where you live, we get the most important data of the week for the AUD.
Inflation data not only moves the currency on its own, but could be instrumental in determining whether the RBA cuts the reference rate again this year.
Despite moving higher so far this month, AUDUSD hasn’t managed to break out of the year-long downward channel it has been stuck in.
It might be optimistic to think it bottomed out in late September. But, if any data were to be able to nudge it higher, it would be CPI.
What We Are Expecting
There a host of different CPI measurements, all of which are important. But the one that the market tracks because it’s the one that the RBA uses for setting policy is the RBA Trimmed Mean CPI.
On a quarterly basis, expectations are for it to remain steady at 0.4% compared to the second quarter. But that would imply a slight lowering of the annual rate to 1.5% compared to 1.6% prior.
A quarterly CPI change of 0.4% would be bang in line with the average it has been maintaining for almost the last four years. Despite the inflation rate remaining relatively stable, it has been below the RBA’s target.
We can, therefore, expect that the central bank won’t be happy to see their favorite measure of inflation not budge after an unprecedented easing cycle.
The Other Measures
Expectations are for third-quarter CPI to come in identical to the prior quarter as well, at 0.6%.
On an annualized basis, however, this would show an increase to 1.8% from 1.6%, bringing it in closer to the RBA’s target. This would put it in a striking range of the projections made by the OECD and IMF, which supports the view that inflation in Australia will be higher next year.
Analysts have pointed to the droughts in Australia as having put upward pressure on food prices and would explain the discrepancy between the trimmed mean and CPI measurements.
With the currency basically leveling off during the last three months, rising import costs are not likely to have contributed to inflation.
What About Interest Rates?
There is a pretty strong consensus that the RBA won’t cut rates for the rest of the year, and it would take a substantial miss in expectations to shake that confidence.
For that matter, there are other indications that might give the bank reason to pause the rate cut. And it’s not just increasing pressure from MPs: retail consumption is not increasing significantly. Neither are home loans, the leading use of borrowed money among Australians.
Despite record-low mortgage rates, few Australians are seeking to refinance loans. Rather than increasing spending, Australians appear to be opting to pay down their existing debt.
The lack of spending isn’t going to help inflation numbers
But, Does the RBA Care?
The RBA has been rather emphatic that they are interested in bringing the unemployment rate down, which has been slowly moving above the structural level.
The standard macroeconomic thinking is that lower unemployment means higher wages mean higher inflation, but salaries in Australia have been rising apace without much change in inflation.
For the currency markets, the practical effect of this might be that we don’t get much of a reaction to inflation data this time around. That is unless the figures come in way outside expectations.