AUD/USD Firm after Australian Inflation Surge to 32-Year Highs

Inflation Surge

Today's data revealed that the Consumer Price Index in Australia jumped 7.3% annually in the third quarter, from +6.1% previously, which is the highest level in thirty-two years. The largest contributors to this surge, were new dwellings (+20.7 per cent) and automotive fuel (+18.0 per cent). On a quarterly basis, the figure was tame, since CPI stayed at 1.8%.

Trimmed Mean CPI which excludes large price rises and falls, climbed 6.1% year-over-year in Q3, from 4.9% prior - staying at the highest level since 2003 and the start of the series, for second straight quarter. Quarter-over-quarter, price rose to 1.8% from 1.5% prior. ^[1]

Central Bank Implications

Based on the August projections, the Reserve Bank of Australia (RBA) expects CPI Inflation to rise to 7.75% in the final quarter of the year ^[2], but with today's 7.3% being very close to it, perhaps there is room for an upside surprise to the bank's 2022 outlook.

The Australian central bank has been following a front-loaded tightening path, having raised rates to 2.6% and the highest levels since 2013. However, officials decided to take a step back at the beginning of this month, given this substantial increase in a small period of time and the lagging nature of these actions.

They delivered a miniscule 25 basis points hike ^[3], in a dovish shift from the previous four consecutive 0.5% moves. This was also in stark contrast with its major counterparts, the RBNZ included, which have not shown any inclination to ease their aggressive rate hike cycles.

Today's inflation data, raise questions as to whether this dovish pivot was the right way to go and put pressure on the RBA for a bigger increase at the upcoming meeting, due next week.

AUD/USD Analysis

The US Dollar stumbled yesterday as bond yields dropped and markets expectation have eased recently around the Fed's terminal rate. This allowed AUD/USD to rise and extends the advance today, helped by the surge in inflation.

The pair now challenges the EMA200 and has the opportunity to push for the 38.2% Fibonacci (0.6538-47), although it does not yet inspire confidence for sustained advance beyond these levels. The Relative Strength Index points to overbought levels and the monetary policy differential is unfavorable, as the Fed is more hawkish.

Below the 38.2% Fibonacci and the EMA200, bears are in the driver's seat and have the ability to send AUD/USD to new 2+ year lows ((0.6169), although they would need fresh impetus for such move.

In any case, the next leg will likely be determined by Thursday's US PCE Inflation update and preliminary Q3 GDP. Markets will then turn to next week's monetary policy decisions by the RBA and the Fed.