CPI Data Key To RBA Rate Cuts And Aussie Direction: April 24, 2012

In the upcoming Asian session we will get the release of the Australian CPI data for the first quarter. We had a prelude, the curtain opener, to that report in Monday’s mornings Asian session as producer prices in Australia fell 0.3% in the first quarter, a reading that was a good deal below the forecast a 0.5% gain. With producer prices falling that should filter down into weaker consumer prices in the coming quarter, inflation pressures should remain subdued.

In terms of consumer prices, CPI is expected to climb 0.8% in the first quarter, the the annual pace is expected to drop to 2.2% from the fourth quarter’s 3.1%. That would bring the annual inflation rate back within the RBA’s target of 1%-3% and would be the weakest reading we’ve had since the 4th quarter of 2009. The RBA itself has signaled that muted inflation from this data release would open the door for rate cuts in order to help the domestic economy – which is growing slower than the RBA has anticipated.

As a result, we should see the Australian dollar pressured as those expectations continue to be priced in. A weaker aussie is also being helped by risk aversion as a result of concerns around Europe which is pressuring commodity currencies.

AUD/USD – Will Bearish Trend From March Resume? The last few weeks have been mainly sideways that for the AUD/USD pair, and today’s report can be the catalyst for the bearish outlook for this pair to come back to the forefront.
While markets have likely anticipated that the RBA will be more dovish going forward – as inter-bank overnight index swaps are now pricing in near 100 basis points of cuts by the RBA over the next 12 months – if that is coupled with risk aversion because of concerns around Europe, China, and/or the US, it could give the pair the chance to slice through its support near 1.0220, which would open up a move towards 1.0120 (the 61.8%) if not parity over the following weeks. 

AUD/CAD – Chance For Further Downside Here As Well

A pair that is similar to the AUD/USD is the AUD/CAD, a pair which the fundamentals favored the Canadian dollar on the back of a stronger US economy and higher oil prices while the Australian dollar suffered on the back of weaker expectations for Chinese growth and the prospect of more RBA rate cuts. More recently the US momentum story has dissipated, weakening some of the Canadian strength, but the Bank of Canada did put out a more hawkish statement last week while employment data was very strong for March. Therefore, if the aussie slides, this pair has a chance to extend its bearish trend as well. The downside targets here would be 1.0185 and if that low from April is breached then the 78.6% retracement of the upswing since early October, which comes in around 1.0120.

GBP/AUD – Can Pound Stretch Its Recent Rally Vs AUD

A third currency pair with the Australian dollar that I might be targeting as part of the CPI release – but also a more general bearish outlook for the aussie considering more rate cuts – would be the GBP/AUD. The fundamental bias for the pound has improved as a result of the lessening chance of quantitative easing from the Bank of England as well as relatively better data in terms of labor market and the retail sales  that came out last week. This pair has come a long way since the middle of February and most recently reached the 1.55 level – a level of resistance that had held in the early part of April.

After bouncing off that resistance and using the 200-daily EMA as support, the pair has breached that old resistance, coming to the next important level at 1.5670. If we have further pressure on the Australian dollar, then the GBP/AUD could make a run towards the highs seen in the middle-late part of November at 1.6050.