- Aussie remains weak as markets await inflation data, Retail Sales from Australia.
- Soft China outlook generates concerns for Australian economy.
- RBA’s hawkish outlook might bail out the Aussie.
The Aussie continues the week on a soft trajectory with the AUD/USD declining by 0.20% to 0.6535 ahead of Retail Sales and inflation data that will guide market expectations further on the Reserve Bank of Australia’s (RBA) next moves. In the meantime, the economic concerns tied to the Chinese economy keep the Australian currency restrained.
With the Australian economy under pressure, inflation persistently above bounds continues to encourage the RBA to postpone rate cuts. According to forecasts, the RBA is expected to be among the tail-enders of the G10 nations who introduce a rate cut, which should limit the Aussie’s downside.
Daily digest market movers: Aussie expected to continue its weakness with anticipation of Inflation and Retail Sales data
- Perpetual 'risk-off' sentiment persists with Australia's economic bearing heavily influenced by worries over Chinese economic slowdowns. Attention will turn toward June's and Q2 CPI data on Wednesday.
- Similar to Q1, Australia’s Q2 headline Consumer Price Index (CPI) is projected to manifest a rise of 1.0% QoQ while anticipating an acceleration to 3.8% YoY from the previous 3.6%. Concurrently, the June headline CPI is predicted to drop to 3.8% YoY.
- With the inflation rate substantially outreaching the 2-3% target range, the RBA is projected not to hastily alter its policy. In that sense, the swaps market is seeing the first 25 bps cut next summer.
- Q2 will also watch the release of real Retail Sales data on Tuesday. Retail Sales volume for Q2 is predicted to show a less severe decline of 0.2% QoQ, comparatively lesser than Q1's 0.4%.
AUD/USD technical analysis: A sustained bearish outlook persists, fundamentals might help in short term
The AUD/USD's continuation below the 20, 100 and 200-day Simple Moving Average (SMA) poses concerns, hinting at a likely prolongment of the bearish trend.
While indicator signals are still deeply rooted in the negative, the oversold situation might lead to a correction. However, the bullish momentum remains weak, intimating at a potential period of sideways trade barring any fundamental catalysts. The mentioned inflation and Retail Sales figures might open the door for an upward move.
Key support levels have revamped to 0.6530 and 0.6500, while resistance levels remain at 0.6600 (200-day SMA), 0.6610 and 0.6630.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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