AUDUSD falls to a 5.5-year low ahead of Australia's all-important CPI numbers

The Australian dollar fell to its lowest level since mid-2009 yesterday amidst a global commodity currency sell-off. Iron prices have retreated to multi-year lows as a slowdown in China hampers the demand outlook for the commodity. The resulting pressure on the Australian dollar has pushed it below an all-important psychological level around 0.8000, reducing the imputes for the Reserve Bank of Australia (RBA) to lower interest rate further in response to soft domestic economic conditions and global monetary policy loosening.

Will global monetary policy loosening sway the RBA’s decision?

Central banks throughout the world are easing monetary policy in an effort to spur demand and inflation in their respective regions/countries, including Europe, Canada and Switzerland. While this isn’t enough to push the RBA into a looser policy stance, it is going to be in the back of the board’s mind when they meet for the first time this year next Tuesday. A survey by Bloomberg suggests that the market is expecting the RBA to leave the official cash rate at 2.5%, although overnight index swaps indicate that the chance of a 25 bps rate cut is building day-by-day (at present the market is pricing in around a 35% chance of a cut in a week’s time).

All eyes on Australia’s inflation numbers

Between now and then there is a slew of economic data that may influence the RBA’s decision, yet the most important is the release of consumer price numbers for Q4. Headline inflation is expected to drop to 1.8% y/y from 2.3% y/y. Core CPI is expected to drop to 2.2% year-on-year, which is at the bottom of the RBA’s 2-3% target range. In the event that numbers meet expectations, or beat then for that matter, it should be enough to stay the bank’s hand at next Tuesday’s policy meeting. However, softer than expected inflation numbers tomorrow may be the tipping point for softer monetary policy in Australia - the threat rising housing prices pose to the economy has diminished slightly of late which gives the RBA more room to cut the official cash rate if it wants to.

Australian business confidence rebounds

Earlier today NAB released its Business Confidence Index which showed that confidence rebounded from its lowest level since mid-2013 in December. The index jumped to a seasonally adjusted 1.7, from 1.5 in November. However, this improvement was marred by a fall in NAB’s Business Conditions Index to 4 in December, from 5 in the prior month. The opposing results of the two Indexes neutralised the impact on the Australian dollar.

The Aussie

AUDUSD appears to consolidating its position below 0.8000. A new near-term range has been established between 0.7860-0.7935; a break either way may induce some bear/bulls to join the fray. Before tomorrow’s CPI numbers, we are expecting some important economic data out of the US tonight, including core durable goods orders, new home sales and consumer confidence figures.