AUD/USD hit hard on low Australian inflation

Australia reported a quarterly inflation level of 0.5%, below +0.7% expected. Year over year, the headline number stands at 1.5%, also below 1.7% predicted. Core inflation, known in Australia as Trimmed Mean CPI, is only 0.3% q/q instead of 0.5% expected and 2.1% y/y against 2.4% expected.

The shortcoming on all numbers hit the Australian dollar hard. Odds for a rate cut on November 3rd have significantly risen.

Also the “weighted median” measure is below predictions at +0.3% q/q and 2.2% y/y, below 0.5% and 2.5% expected respectively. So, it’s a miss on all 6 numbers.

Rate cut?

The Reserve Bank of Australia convenes on November 3rd to discuss the interest rate, which  currently stands on 2%.  Expectations for  a cut were already given a boost after regulatory changes triggered a raise of the mortgage rate by Westpac. Lower inflation also lifts expectations, yet it’s not a done deal

Some banks like RBC say that this raises the chances of a rate cut in December, but not in November.  AMP Capital does see a cut next week, and it’s now more  confident. Also Citi see a cut, but say it’s a close  call.

ANZ still don’t see a  rate cut in 2016. Westpac, that ignited the rate cut talk with its own move on mortgages, still sees the RBA holding its fire.

Outside Australia, Goldman Sachs see their rate cut call reinforced, seeing the underlying inflation at the lowest since the 90s and say that Glenn Stevens and co. have “little choice”. HSBC changed camps: it argued against a cut and this CPI release caused it to change its mind and see a move to 1.75% as “most likely”.

ANZ go further and call this CPI release a “game changer” forcing a rate cut. What do you think?

AUD/USD

The Australian dollar traded in range looking for a direction. It has certainly chosen one.

AUD/USD was already struggling to get a grip on the low end of the range at 0.72, and the  publication sent it to 0.7111. From here, it’s only a “dead cat bounce” so far.