AUDUSD backs off 0.9400 as investor sentiment weakens; eyes on Stevens and CPI data

AUDUSD backed off an important short-term resistance zone around 0.9400, with investor sentiment faltering on geopolitical concerns in the absence of any major market moving economic data or events overnight. Investors are similarly cautious about weaker than expected Australian inflation numbers tomorrow which is contributing to the aussie’s fall. The market is also eagerly waiting for a speech by RBA Governor Stevens at the Anika Foundation Luncheon in Sydney at 1300AEST (0300GMT) today.

Will Stevens jawbone the aussie lower again?

There are some whisperings in the market that the Governor may fire another verbal barrage at the commodity currency after last month’s surprise jawboning, but he may not be as aggressive this time around. The RBA is steering away from jawboning its currency, thus Stevens may simply repeat the tired old lines about the Australian dollar being overvalued and detrimental to growth. As long as he sticks to this script we don’t expect the speech to have a significant or prolonged negative impact on the Aussie. In saying that, the fragile commodity currency may weaken in the short-term. In the event that he is more aggressive about the negative impacts of the high exchange rate, then AUDUSD may punch through a key support zone around 0.9325/35.

Australia’s inflation data to test the AUD

The most important test for the Australian dollar will come from tomorrow’s inflation data, which is expected to show that consumer prices jumped 0.5% last quarter. Trimmed mean and weighed median (two measures of core inflation) are expected to rise 0.6% q/q and 0.7% q/q respectively, which would bring core inflation to around 2.7% y/y. This is approaching the top of the RBA’s 2-3% target range, but the bank appears comfortable with high inflation in the near-term.

Stagnant wage growth, weak domestic demand and a rising unemployment rate should see inflation moderate in the second half of this year. Given that inflation is expected to soften later in the year, a weaker than expected print tomorrow could hit the aussie hard. Recent soft economic data and a stubbornly high Australian dollar have raised the likelihood that the RBA will cut the official cash rate again in coming quarters – meek inflation may be the final nail in the coffin for interest rates.

It’s also worth keeping an eye on US inflation and existing home sales figures, which are both due out tonight. US core and headline CPI are expected to increase 0.3% m/m (prior 0.4%) and 2.1% y/y (prior 2.1%) in June respectively. Existing home sales are anticipated to rise 4.99M in June, after rising 4.89M in the prior month.

Source: FOREX.com