The aussie likes Australia's inflation numbers, but will the RBA?

The release of Australia’s inflation numbers for last quarter has further complicated the outlook for next month’s monetary policy meeting at the Reserve Bank of Australia. Only a week ago the market was pricing in around 75% chance that the RBA would lob 25 basis points off the official cash rate in May, but a couple of stronger than expected pieces of economic has changed all that. The market is now split down the middle, setting the stage from another exciting policy meeting at the RBA.

Earlier today Australia released it inflation numbers for last quarter, which came in slightly better than expected. Headline CPI growth is 0.2% q/q and 1.3% y/y, beating an expected 0.1% q/q increase but matching the market’s expectations for a 1.3% y/y gain. The more important core-inflation figures are also slightly better than expected, with weighted mean CPI jumping 0.6% and 2.4% y/y, beating expected increases of 0.5% and 2.3% respectively. Trimmed mean inflation came in at 0.6% q/q, matching expectations.

Overall, the data makes it slightly less likely that the RBA will cut interest rates next month, as it shows that the bank can still afford to wait on the sidelines. In saying that, we aren’t ruling out the possibility of a rate cut in May due a lack of activity in non-resources parts of the economy. Stevens pretty much said as much during a speech in NY earlier this week. He also noted that Sydney house prices – a major factor in the bank’s latest policy meetings - ‘look rather exuberant’ but one city cannot dictate policy for the entire economy; adding that an interest rate cut ‘has to be on the table’.

The aussie

The Australian dollar jumped on the back of today’s inflation data, which is to be expected given that the numbers make it less likely that the RBA will lower the OCR next month. The market is now thoroughly confused as to what to expect from the RBA next month, with Stevens refusing to rule out the possibility of lower interest rates at the same time as stronger than expected economic data seems to suggest that the need for looser monetary policy has diminished of late.

As we highlighted yesterday, AUDNZD doesn’t appear to have the legs to break through parity at this stage. Today’s stronger than expected inflation numbers only added weighted to this outlook, making it less likely that it can push through the all-important support zone around 1.000 in the near-term. AUDUSD jumped through a short-term resistance zone around 0.7750 and may be heading towards another resistance zone around 0.7830, unless the USD faces another widespread rally.