Will Australia’s Inflation Data Nudge The RBA Out Of Its Lull?

Australia’s inflation prints are due out on Wednesday at 00:30 GMT and expectations are for the CPI rate to re-enter the Reserve Bank of Australia’s (RBA) target band. Will this be enough to trigger an optimistic response by the Bank when it meets again next week, or are there more hurdles to be overcome before that happens?

The Australian dollar has staged a spectacular run so far in 2018, gaining nearly 4% against its US counterpart, though the rally reflects more USD weakness than AUD strength – evident by the muted movements in other Aussie crosses. Whether the pair will continue to move higher in the near-term, or catch its breath by correcting lower, will probably depend on the quality of Australia’s inflation data for the final quarter of 2017.

The forecast is for the headline CPI rate to rise to 2.0% in yearly terms, from 1.8% previously, while the trimmed mean rate is expected to tick up to 1.9% from 1.8%, staying just shy of the RBA’s target band of 2-3%. Such prints would hardly be any surprise for policymakers however, considering that in its latest forecasts back in November, the RBA already anticipated the headline CPI to rest at 2% by year-end. Thus, even though an uptick in these rates would be a positive development, it is unlikely to trigger a significant change in the neutral tone the RBA has maintained in recent months.

For the RBA to really change tune, we would probably need to see the CPI rates beat their forecasts, perhaps with both rates coming higher than 2%. Something like that would be a major hawkish surprise for the Bank, which anticipates the CPI rate to reach 2.25% only in December 2018. That could lead the RBA to adopt a more optimistic tone, laying the groundwork for a rate hike sooner than previously signaled and thereby, leading to a surge in the AUD. In this scenario, aussie/dollar could surge and target its recent highs at 0.8135. An upside break of that territory would mark a 2½-year high for the pair, and could pave the way for the round figure of 0.8200.

On the other hand, a disappointment in these prints would likely keep the RBA sidelined for longer, leading market participants to price out expectations for a rate hike this year and causing the AUD to weaken. Such an outcome could see aussie/dollar correct lower towards the psychological territory of 0.8000, with a potential break below that level possible to open the way for the 0.7960 support. As always, the magnitude of any market reaction at the time of the release will depend on the deviation of the actual data prints from the forecasts.