FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that the overnight release of Australian Q4 CPI inflation was a touch stronger than expected; the headline measure ticked higher to 1.7% y/y and the underlying measure edged up to 2.1%.
Key Quotes
“The firmer tone of the data further depressed hopes that the RBA may cut rates again at the February 2 RBA policy meeting which lent the AUD solid support overnight. However, we would argue that the CPI report adds little to the deliberations that are likely to take place within the central bank next week.
Although Australia has an advantage over many other developed economies insofar as its inflation rate is firmly in positive ground, it is below the 2% to 3% targeted band. The weakness of the AUD is essentially a function of the plunges in the value of key commodity exports such as coal and iron ore.
While the RBA may be wary about the potential for imported inflation going forward, we expect to it to be far more concerned about the disinflationary pressures which the Australian economy is exposed to and which could stem demand going forward.
Insofar as there is little evidence that imported price pressures are a threat, we would expect the RBA to continue to devote attention to the disinflation threats such as the question as to why wage inflation remains so low in Australia.
While the RBA decided in December that “the forecasts for the Australian economy were for output to strengthen gradually over the next two years”, it still left the door for further easing open since “members judged that the outlook for inflation may afford some scope for a further easing of monetary policy”. We would expect the RBA to open that door a little wider at next week’s policy meeting and we maintain our preference for selling AUD/USD into rallies.
At its last policy meeting in December the RBNZ not only cut rates but made it very clear that policymakers would “reduce rates if circumstances warrant”. Since the start of the year the value of the New Zealand effective exchange has dropped. This may appease the doves of the committee a little but CPI inflation registered just 0.1% y/y in Q4 and this has been followed by further signs that house price inflation may be easing. Despite market expectations clearly favouring a steady policy outcome from the RBNZ we see a good chance that the Bank may cut rates again this week. We continue to favour the downside in NZD/USD towards 0.64 on a 3 mth view.”
(Market News Provided by FXstreet)