Australian Q3 CPI Disappoints

The Australian Dollar came under pressure over the Asian and European session on Wednesday following a downside surprise in the Q3 CPI reading. Headline inflation rose 0.6% quarter-on-quarter, undershooting expectations of a 0.8% rise. On a seasonally adjusted basis, the headline reading increased 0.4%, unchanged from 0.2% Q2 2017. Underlying inflation saw some moderation with trimmed mean inflation increasing 0.4% QoQ and weighted median inflation rising just 0.3%, down from 0.4% in Q1 and 0.5% in Q2.

The rate of inflation among tradables fell for the fourth consecutive quarter, declining 3.1% in Q3, which is the biggest drop since Q4 2014. The rate also turned negative on a year-over-year basis which is the first time this has happened since Q3 2015. Non-tradable however, rose to a four year high at 3.5% mainly driven by a surge in utility costs which is likely to continue to be a theme. Notably, the next quarter’s headline CPI reading will be based on new weightings which the Australian Bureau of Statistics has said it will release on November 6^th.

The fall-back in inflation has seen the market unwinding the hawkish RBA expectations which have been building over recent months. Strong data recently had encouraged the view that the RBA would follow the general tide of hawkishness sweeping across most G10 central banks currently. However, the RBA have been careful to reiterate their cautious stance with governor Lowe noting that, while he sees the next rate move as an increase, it likely won’t be for some time and will be data dependent. RBA’s Harper, however, has recently said that he feels a further rate cut cannot be ruled out as weakened wage growth and household incomes present a challenge to the economy.

Market Reaction & Technical Perspective

AUD was heavily sold in response to the data which all but rules out a 2017 rate hike, which was the driver behind the bullish position. Price has now broken down below the local rising trendline and below the prior October low and is on course to test the 50% retracement from last year’s lows around .7614 ahead of deeper support at the 61.8% retracement level and the completion of a large ABCD pattern around .7525.