Australian Dollar Plunges On Soft CPI Data

By Lujia Lin,

THE TAKEAWAY: CPIdata shows slowing price increases > Data implies greater scopefor rate cuts, monetary easing > AUDfalls

The Australian Dollar fell sharply after the release of CPI data showing reduced inflationary pressures. As of 00:55 GMT, the Aussie was down nearly 70 pips versus the USD at 1.0366.

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The Australian Bureau of Statistics reported that CPI in the third quarter rose 3.5 percent YoY (vs. 3.6 percent in Q2) and 0.6 percent QoQ (vs. 0.9 percent in Q2), in line with expectations. At the same time, a measure of core inflation using the RBA’s trimmed-mean methodology slowed to 2.3 percent YoY from 2.6 percent in Q2. These figures point to a slowdown in inflation, and suggest that quarter-over-quarter price rises continue to slow after reaching a high of 1.6 percent in Q1 2011. Inflation could slow further as the effects on food prices of the Queensland floods earlier this year fade.

Wednesday’s inflation figures reinforced expectations that the RBA will cut the developed world’s highest interest rate at its next meeting on November 1. According to Credit Suisse data on overnight-index swaps, market expectations for a rate cut surged following the data release, with the swaps now predicting certainty of at least a 25 bp point cut next Tuesday. Over the next 12 months, swaps now expect 121 bps of rate cuts.

Coming on the heels of PPI data showing a similar slowdown in price increases, the CPI figures suggest reduced inflationary pressures and more scope for monetary easing. However, with mining investment in Australia remaining strong, falling unemployment, and a recovering construction industry, it remains to be seen how accommodating a stance the RBA is willing to adopt. Markets will be closely examining next week’s RBA statement for signals on the direction of monetary policy; a dovish tone can be expected to send AUD even lower against its US counterpart. In the meantime, risk sentiment – guided foremost by the outcome of the EU summit on Wednesday – will impact the Aussie in the coming days.
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/market_alert/2011/10/26/Australian_Dollar_Plunges_on_Soft_CPI_Data.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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