AUD/USD: Longs In Good Shape, Eyes On Jobs Report Now

• The Australian dollar jumped on Tuesday on rising appetite for the high-yielding currencies and as the greenback edged away from a seven-month peak after recent gains.

• Reserve Bank of Australia Governor Philip Lowe noted core inflation of 1.5% was well below the target band of 2% to 3% and looked set to remain low for some time. “Achieving the quickest return of inflation back to 2.5% would be unlikely to be in the public interest if it came at the cost of a weakening of balance sheets and an unsustainable build-up of leverage in response to historically low interest rates,” Lowe told an investment conference. "Conversely, the case for moving more quickly would be strengthened in a world where the labour market was deteriorating and people were having increasing difficulty finding jobs."

• Consumer prices rose a meagre 1% in the year to June while core inflation hit a record low at 1.5%, well below the RBA's target band of 2% to 3%. Figures for the third quarter are due next week and are expected to show core inflation stayed stuck around 1.5%. Lowe said: “The experience elsewhere suggests that we do need to guard against inflation expectations falling too far, for if this were to occur it would be more difficult to achieve the inflation target.”

• Overall, Lowe said the Australian economy was performing "reasonably well" with a long slump in mining investment past its worst and growth set to benefit from a recent rise in prices for resource exports. Lowe said data on the labour market had been more mixed, with unemployment drifting lower but new jobs weighted heavily to part-time work and wages growth still weak. The next report on employment is due on Thursday and the market expects a slight rise in the jobless rate to 5.7%.

• Newly-released minutes of the RBA's October policy meeting said coming data on inflation and employment will be critical for decisions at its next meeting on November  1, opening the door to possible policy easing. However, for our economists monetary easing in Australia is still a distant possibility. The market also does not believe in a rate cut in November. Interbank futures imply only a 16% chance of a cut in the cash rate next month.

• The AUD is among the best performing major currencies this year, up more than 5% against the USD. Much of the gain is due to carry trades where investors borrow in currencies seen as safe havens such as the JPY or the EUR to invest in high-yielding assets. A recent rebound in prices of iron ore and coal - Australia's two largest exports - has also helped the Aussie.

• Our long-term AUD/USD position is in good shape and relatively dovish comments from Lowe supported also our short-term outlook.  Our view on the AUD/USD remains bullish. There are some strong resistance levels ahead:  September 29 high at 0.7710, September 9 high at 0.7732 and August 10 high at 0.7756. We need good employment report on Thursday to break above this resistance and our forecast is slightly better than market consensus.

 

NZD/USD Climbs On Higher-Than-Expected CPI

• New Zealand's CPI rose a higher-than-expected 0.2% in the third quarter. Annual inflation was also 0.2%. The market had forecast the CPI to be unchanged for the quarter, with an annual rise of 0.1%. That compared to 0.4% in the prior quarter.

• Housing-related prices were the main upward contributor to the annual rate, up 3.2% on the year. This was offset by transport prices, as prices for fuel and vehicle relicensing fell.

• New Zealand's central bank is mandated to keep annual inflation in a 1-3% band, with a focus on the midpoint. It is widely expected to cut rates by 25 basis points to a record low 1.75% on November 10 as inflation remains well below target. However, today’s CPI reading lowers the likelihood of a further cut in 2017.

• We got long at 0.7110 yesterday. Daily RSI is biased up, so further gains look likely. The October 14 low acts as a support. Our NZD/USD long target is 0.7290.

 

EUR/GBP: Biggest UK Inflation Jump In Two Years

• British consumer price inflation rose to 1.0% yoy from 0.6% yoy in August, the highest level since November 2014 and the biggest jump from one month to the next since June 2014. The market had expected a reading of 0.9%.

• Core consumer price inflation, which strips out changes in the price of energy, food, alcohol and tobacco, rose to 1.5% from 1.3%, slightly above economists' expectations for 1.4%. Factory gate prices increased 1.2%, the biggest increase in three years, and slightly stronger than forecasts of a 1.1% annual increase. The Office for National Statistics also released figures for August house prices, which showed an 8.4% annual rise across the United Kingdom as a whole compared with 8.0% in July. Prices in London alone increased 12.1%.

• September’s rise in inflation is only the start of a much broader increase, fuelled by the pound's near 20% plunge since June's vote to leave the European Union.

• BoE Governor Mark Carney last week said the central bank could tolerate "a bit" of an overshoot against its inflation target, to help accommodate economic growth and employment. British government bond prices fell after the stronger than expected figures which will further dampen expectations that the Bank of England will cut interest rates again this year.

• The central bank forecast in August that inflation would pick up sharply to hit its 2% target in around a year and then overshoot for the next couple of years, as sterling's big fall after Britain's vote to leave the EU pushes up the cost of imports. But the surge in inflation risks proving bigger, after sterling plunged to its lowest level on record against a basket of currencies last week, something which is likely to force the BoE to revise up its inflation forecasts next month.

• The EUR/GBP is falling gradually in recent days, but 0.8967 (61.8% fibo of September-October rise) is still a strong support level. Breaking below this level will open the way to a further fall into the area of 0.8845/0.8780. We stay short for 0.8860 in the short-term part of our portfolio, but the long-term outlook remains bullish.