Australia producers are charging more now. According to the Producer Price Index, Q/Q prices increased by 0.3%, a slight acceleration from previous quarter’s 0.2%. Y/Y numbers are also better, coming in at 1.6% vs 1.0% previous. Looking at the increasing pace of rising prices, it seems that inflation is healthy and well. Even though the Y/Y increment is below the 2.0 – 3.0% RBA target, it is highly likely that final CPI numbers (based on retail products) will reach the desired >2.0% when the producer prices get feed down into retail pipelines.
This in theory should be bullish for AUD/USD. Healthy inflation means that the likelihood of RBA cutting rates will decrease. However, reaction from the news remain muted and AUD/USD actually traded lower and not higher following the news. It seems that market has already priced in the no-rate-cut scenario earlier on after a more hawkish/less dovish statement together with the RBA rate decision ( or rather non-decision). Looking across the Tasman Sea, RBNZ has indicated that they will not be altering rates this year, and in all likelihood RBA may adopt the same stance.
It is also important to note that AUD/USD has been on a downtrend since 1st May all the while knowing that RBA has turned less dovish. As such, it is no surprise that the better PPI numbers are not able to push prices up significantly. From a technical perspective, current price is being kept below the support turned resistance which has been keeping consolidation zones found yesterday and last Friday. Stochastic reading appears to be peaking just as price is hitting the resistance, suggesting that price may head towards 1.022 floor once again should the bear cycle proves to be right.
From the Daily Chart, we can see an interim peak forming on Stochastic following the huge decline after 1.035 ceiling was confirmed. Despite the rebound on 1.022, which is the confluence with April’s lows, Stoch line continue to point lower, while Signal line remains flat. This peak is around the same levels back in Feb, which is also when 1.035 ceiling managed to hold its own for a while before bears ultimately pushed lower to 1.015. Is the same potentially going to happen right now? Without the ability to see the future, it is hard to say for sure. But we can look to fundamentals which tells us that Australia’s economy is doing “so-so”, not fantastic but not dismal either. This may mean that price will not be able to find strong fundamental drivers to bring it higher or lower, especially with RBA’s sentiment heavily discounted long ago.
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