The aussie dollar was in focus today as investors prepare themselves for the RBA’s monetary policy meeting next week. AUD has been looking very cautious ever since the surprisingly large jump in 3Q inflation. Building approvals data out of Australia today and comments from RBA deputy governor Lowe last night further complicate the situation.
Overall, investors are becoming increasingly unsure if the RBA is going to cut the official cash rate next week, something that seemed like an almost foregone conclusion only 9 days ago.
The market is second guessing itself regarding next week’s RBA meeting
In fact, current pricing in interbank futures suggests it will almost be a 50/50 call whether the RBA moves to cut the official cash rate by 25bps, down from around 70% at the beginning of last week. Whilst the latest inflation print does complicate the situation, it doesn’t necessarily rule out the possibly of another rate cut. After all, core inflation is in the middle of the RBA’s target range or at the bottom if you take out the carbon effect, meaning there isn’t a big risk of inflation getting too high for comfort, especially given the effects of the carbon tax are expected to dissipate this quarter.
What is AU economic data telling us?
The confusion doesn’t only steam from inflation data, but also mixed economic data we have been getting from Australia over the last month. Whist inflation, employment and building approvals data may make a case for the RBA to stay on hold, retail sales, confidence and the headline unemployment rate may create room for another 25 bps cut.
Australian building approvals surprise on the upside
Today’s building approvals data surprised the market on the upside once again, printing at +7.6% vs. 1.0% exp. Accordingly, the aussie shot higher on the back of the data, with AUDUSD hitting around 1.0390, before creating a double top and retracing back below 1.0380. Looking ahead, it is going to be tough for the pair to break through 1.0410 without a significant fundamental reason; specifically China’s manufacturing PMI data out tomorrow, a pickup in sentiment stemming from Europe and/or the US or, importantly, next week’s rate decision from the RBA.
JPY stays quiet after yesterday’s big push higher
In other news, no one was really surprised when manufacturing PMI data out of Japan plunged ever further into contraction territory, with the unofficial figure printing at 46.9 vs. 48.0 prior (50 separates contraction and expansion).
Unsurprisingly, the yen wasn’t greatly moved by the announcement. JPY continues to look wary of retracing too far after yesterday’s disappointing announcement from the BoJ.
USDJPY looks trapped below 79.70 in the near-term. Although, if the pair manages to break free of this level 80.00 is back in focus.
AUDUSD – hourly