AUD: Inflation picks up from lows offering support - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the Australian dollar has outperformed during the Asian trading session supported by the release of the latest Australian CPI report for Q3.

Key Quotes

“As a result the tradeweighted Australian dollar has risen to its highest level since April. The report revealed that headline inflation increased firmly by a quarterly rate of 0.7% which helped lift the annual rate to 1.3% in Q3 up from 1.0% in Q2. It increases the likelihood that the economy has passed the low point for inflation. The core inflation measures increased more moderately by quarterly rates of around 0.4% which was broadly in line with the RBA’s outlook for inflation in the near-term. The report has prompted the Australian interest rate market to scale back expectations for further RBA monetary easing offering support for the Aussie. The RBA is currently comfortable to leave monetary policy unchanged for the foreseeable future unless there is negative economic shock or surprise.

One area of concern for the RBA is the ongoing loss of momentum in the Australian labour market which has seen employment growth slow to an average monthly pace of 5.6k jobs in the first nine months of this year compared to 20.6k jobs in the same period of last year. If the Australian dollar continues to strengthen it could also start to become more of a policy concern for the RBA threatening to undermine the rebalancing of the Australian economy and the inflation outlook. The developments still leave open the possibility that the RBA could lower rates further next year.

However, it appears highly unlikely that another rate cut will be delivered this year which should allow the Aussie to continue trading on a firmer footing heading into year end. The Aussie is also continuing to derive support from the Chinese economy which has displayed greater stability this year. Our analysts in Hong Kong remain sceptical over the sustainability of the recent improvement in growth which has been boosted by policy stimulus. Yet economic momentum is still favourable for the Chinese economy heading into year end. If the Chinese economy is likely to slow again it is more likely to happen later next year increasing downside risks for the Aussie as the year progresses.”