Tomorrow at 12:30 am GMT Australia will print its inflation numbers for Q3 2016.
What are market players expecting this time? More importantly, how can you get some pips from the event?
Here are four points you should know before you draft your trading plans:
RBA isn’t too interested in another rate cut
The biggest reason why market players are watching the Q3 2016 inflation numbers is that April and July’s releases became catalysts in the last two RBA interest rate cuts. A straightforward enough correlation, except for two things:
First, the RBA was already considering rate cuts even BEFORE the Q1 and Q2 CPI reports were released. In its April decision, the central bank warned that “continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.”
Then, in July it cautioned that “further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.” By contrast, September’s final statement contained no spoilers:
“Taking account of the available information, and having eased monetary policy at its May and August meetings, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
The RBA’s September meeting minutes also reinforced its less-than-dovish tone. In it, the members hinted that growth and employment trends, though not ideal, are still within the central bank’s expectations while consumer and housing prices haven’t been volatile recently.
It’s the “weighted mean CPI” you should worry about
Forget the headline numbers. Back in July, the RBA shrugged off the better-than-expected headline CPI report because the annualized weighted mean CPI broke the 1.4% floor and clocked in at 1.3%.
The RBA defines its “weighted mean CPI” as the weighted mean of the central 70% of the quarterly price change distribution of all CPI components. Oh, and FYI, Governor Lowe and his team want core inflation somewhere between 2.0% – 3.0% on average.
Here’s what traders are estimating for Q3 2016:
- Headline CPI (q/q): 0.5% vs. 0.4% previous
- Headline CPI (y/y): 1.1% vs. 1.0% previous
- Trimmed mean CPI (q/q): 0.4% vs. 0.5% previous
- Trimmed mean CPI (y/y): expected to remain at 1.7%
- Weighted mean CPI (q/q): expected to remain at 0.4%
- Weighted mean CPI (y/y): 1.4% vs. 1.3% previous
AUD’s post-CPI trend could last for days
As you can see on the chart below, the CPI releases this year have so far resulted in extended moves for the Aussie.
The most noticeable one was in April when both the headline and core figures printed to the downside and Aussie bears didn’t breathe for air until the end of May.
Meanwhile, the mixed signals in the July release helped contain the Aussie’s losses before another catalyst pushed it higher.
It won’t take much to trigger the RBA
Despite the RBA’s confidence, it probably won’t take much to put a rate cut back on the table. See, factors such as rising underemployment, weak rental markets, and increased retailer competition are already weighing on Australia’s inflation prospects.
This time around both the RBA and market players are expecting stronger inflation readings compared to Q2 2016. Upside surprises could confirm the RBA’s confidence that inflation will return to its target.
Meanwhile, significant misses could urge the RBA to re-evaluate its notes and execute a rate cut in November anyway.
Watch out for the second scenario, will ya? Since the Aussie has been climbing across the board for the past couple of days, it won’t take much for forex players to push the comdoll lower in case of downside surprises.