Australian CPI inflation deflates calls for a rate cut

Today's inflation figures show an annualised reading of 3%, at the top of RBA inflation band, to dampen likelihood of a rate cut.

Until today's release the Aussie had lacked both volatility and direction, but following today's positive inflation data the Aussie is now trading at a 9-day highs and appears set to test 0.945. However I expect it to meet headwinds at this level as this could entice profit taking and entice bearish traders to enter short.

A bullish close today near current levels would add to the argument we are seeing a basing pattern forming above 0.9320. Since the bearish decline form 95c (and the 2 most bearish consecutive days in 6-months) bulls have successfully defended the 0.932 level with intraday bullish momentum clearly more bullish.

Tomorrow we have China PMI data which if positive should help support the A$ above 94c. A break back below 94c puts as back into 'no-man’s land' as this lacks any clear direction, with a break below 0.932 swing low to become bearish, keeping in mind we are just above the 93c level.

Does today's inflation raise pressure for a rate increase?

Annualised inflation is now at the top of the "2-3%" band targeted by the RBA, which will raise hopes of a rate increase. Looking at CPI annualised it certainly looks more rosy for Australia, now sitting higher for the 3rd consecutive quarter and at its highest since 2012. However 1 figure at or above this threshold does not necessarily mean rates have to be risen. For example RBA may want to wait for 2 or more quarters above this band before seriously considering it. There are also others factors in play.

Uncertainty remains as to the effectiveness of the current cash rate at 2.5% and it is too soon to completely rule out a rate cut from RBA over the coming months. As we progress further into the year and tapering winds up from the US then I expect this to weigh down heavily on both the A$ and NZD$. Whilst there is a hunt for yields globally from investors, a rate rise from a low yield US will be more significant than a lower rate cut from RBA in my opinion and we should see the A$ back below 90c.

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