Australian Dollar Mixed as CPI Falls Short of Guaranteeing RBA Hike

Australia’s quarterly CPI report kept inflation above the Reserve Bank of Australia’s target band, but not convincingly enough to lock in a February rate hike. While trimmed mean inflation remains uncomfortably high, bond markets and the Australian dollar both signalled a degree of scepticism, suggesting the data failed to materially shift policy expectations.

 

 

CPI Fails to Seal RBA Hike as Australian Dollar Trades Mixed

The RBA has held its overnight cash rate (OCR) at 3.6% for four consecutive meetings. While it has yet to confirm that the easing cycle is over, many suspect it is. A strong December employment report last week saw RBA cash rate futures price in roughly a 60% chance of a February hike. That said, the decisive test was always going to be today’s quarterly CPI report.

Source: ABS, LSEG

 

• Trimmed mean CPI increased to 3.4% y/y to mark its first quarter outside the upper band of the RBA’s 1-3% target since Q4 2024
• Trimmed mean also rose 0.9% q/q, up from 1% in Q3, dragging its 4-quarter average up to 0.83% (3.3% annualised)
• CPI increased to 3.8% y/y, up from 3.4% prior
• Housing increased 5.5% y/y and was the main contributor to the headline figure
• Within housing, electricity has risen 21.5% y/y, rents were up 3.9%

 

 

While inflationary pressures persist and keep the prospect of a hike alive, I’m not convinced these numbers alone seal the deal. Yes, the RBA has reason to be concerned. But it has also become far more reserved when it comes to rate decisions in recent years — not to mention that further hikes are a political hot potato for a supposedly independent central bank. I’d also be surprised if the RBA moved ahead of the RBNZ, a central bank not known for sitting idle for long.

Still, the recent run of firm data overall paves the way for a hawkish tone. Expect the RBA to keep its finger hovering over the hike button and reiterate that policy decisions will continue to be made on a ‘meeting-by-meeting’ basis.

 

 

Australian Dollar Rally Mutes CPI Impact

Any impact this inflation report was supposed to have on the Australian dollar has been largely muted by the strong rally leading into it. A sharply weaker US dollar, alongside surging gold and silver prices, catapulted the Aussie to an 11-month high ahead of the CPI figures, leaving little room for upside surprise for AUD/USD bulls. Add to that the fact the 3-year yield — a proxy for RBA policy expectations — is 5 basis points lower, and it’s clear this CPI release has not provided the certainty of a hike that RBA bulls were hoping for.

Source: ICE, TradingView

 

• AUD/CAD is flat on the day after meeting resistance at its 2023 high and handing back its 40-pip pre-CPI advance.
• The Aussie is also flat against the euro. While AUD/EUR remains in an uptrend, two shooting-star candles warn of trend exhaustion and the risk of at least a minor pullback.
• AUD/JPY is ticking higher for a second day from trend support, though these gains are modest relative to the volatile two-day retracement from just beneath its 2024 high.
• The Aussie has also handed back earlier gains against the British pound, with AUD/GBP hinting at a near-term cycle high — potentially bullish for GBP/AUD over the near term.
• AUD/USD is retracing from the 70-cent handle — an obvious level for a breather given the strength of the rally into these levels.
• Australia’s 3-year yield is on track for a
• bearish outside day, hinting at fading conviction among bond traders for an imminent RBA hike.

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge