FX comment – AUD declines after Q3 inflation disappoints; RBA easing expectations rise

by: Roy Teo

  

  • Australian dollar declines after inflation in the third quarter declines
  • Case for the RBA to ease sooner than later
  • AUD to decline to 0.70 by end 2015

 

 

AUD declines after inflation in the third quarter declines

This morning, the Australian dollar (AUD) fell sharply by about 60 pips to 0.7120 after inflation in the third quarter was weaker than expected. Headline inflation was steady at 1.5% yoy against market expectations of 1.7% gain. However, the RBA’s preferred measure of inflation, the trimmed mean eased from 2.2% yoy to 2.1% yoy, lower than market expectations of a 2.4% rise. Inflation has declined for the second consecutive quarter and is at the lowest level since the second quarter of 2012.

Case for the RBA to ease sooner than later

Though the RBA’s preferred measure of inflation remains above the lower bound of 2-3% target, it is evident that inflationary pressures are easing. In addition, inflation expectations implied by the bond market are also lower than in May when the RBA cut the Official Cash Rate (OCR) by 25bp to 2%. We stick to our view that there is a case for the RBA to lower the OCR by 25bp to 1.75% in the next monetary policy meeting in November. This is not fully priced in by financial markets.

AUD to decline to 0.70 by end 2015

Technical indicators in the hourly chart implies that the AUD is in oversold territory. Hence we think that the AUD is likely to consolidate above 0.7100 ahead of the FOMC decision tonight. In the event that the Fed is more cautious than market expectations, the AUD could potentially recover back to around the 0.72-0.7250 region. We favour fading any relief rally in the AUD with a year end target of 0.70.