The Australian dollar may face increased selling pressures over the next 24 hours of trading as economists forecast the annual rate of inflation to fall to a 10-year low of 1.5% in the second quarter, and the drop in consumer prices could reinforce speculation for lower borrowing costs as the central bank maintains a dovish outlook for price growth.
[B][U]Trading the News: Australia Consumer Prices[/U][/B]
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What’s Expected[/U][/B]
Time of release: [B]07/21/2009[/B][B] 01:30 GMT, 21:30 EST[/B]
Primary Pair Impact[B] : AUDUSD[/B]
Expected: 1.5%
Previous: 2.5%
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Impact the Australia Consumer Price report had on AUDUSD over the last 2 quarters[/U][/B]
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[U]1Q 2009 [/U][U]Australia[/U][U] Consumer Prices[/U]
Price pressures in Australia fell further during the second quarter, with the annual rate of price growth falling to 2.5% from the previous year, and the outlook for inflation remains bleak as the $1T economy heads into a recession for the first time in nearly two-decades. As a result, Reserve Bank of Australia Governor Glenn Stevens continued to hold a dovish outlook for prices even after lowering the benchmark interest rate to a 49-year low of 3.00% earlier this month, and said that inflation ‘is more likely to be down than up’ as the downturn in the global economy intensifies. Moreover, the central bank head went onto say that ‘the Australian economy, too, is in a recession,’ and market participants anticipate the RBA to lower the cash rate by another 25bp to 2.7% next month as the outlook for growth and inflation remains bleak. As a result, the Australian may continue to face headwinds over the month as investors raise bets for a rate cut in May.
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4Q 2008 Australia Consumer Prices[/U]
Consumer prices in Australia fell 0.3% in the fourth quarter to mark the biggest decline in 11-years, with the annual rate of inflation slipping to 3.7% from 5.0% in the previous year, and price pressures are likely to weaken further in 2009 as the $1T economy teeters on the brink of a recession for the first time since 1991. As the downturn in the global economy intensifies, market participants anticipate the Reserve Bank of Australia to lower the cash rate by 100bp to 3.25% next month in an effort to shore up the region, and policymakers may continue to take unprecedented steps over the coming months in order to stem the downside risks for growth and inflation. At the same time, Treasurer Wayne Swan said that the priority ‘is to support growth and support jobs,’ and that ‘the government stands ready to take whatever action is required’ to jump-start the ailing economy. As policymakers hold a dovish outlook for inflation, the Australian dollar may continue to weaken against its currency counterparts as investors anticipate borrowing costs to fall lower.
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What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[B][U]Bullish Scenario:[/U][/B]
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If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on AUDUSD ahead of the data release.
[B][U]Bearish Scenario:[/U][/B]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the AUD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on AUDUSD ahead of the data release.
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How To Trade This Event Risk[/B]
The Australian dollar may face increased selling pressures over the next 24 hours of trading as economists forecast the annual rate of inflation to fall to a 10-year low of 1.5% in the second quarter, and the drop in consumer prices could reinforce speculation for lower borrowing costs as the central bank maintains a dovish outlook for price growth. A report by the Bureau of Statistics showed producer prices plunged 0.8% from the first quarter to mark the biggest drop since recordkeeping began in 1998, while a separate report showed export prices tumbled 20.6% during the three-months through June, which is the biggest decline since the series began in 1974. Moreover, the cost of imports slumped 6.4% during the same period to mark the largest drop on record, and the appreciation in the Australian dollar is likely to hamper the outlook for price growth as the high-yielding currency continues to benefit from the rebound in market sentiment. At the same time, the 1Q GDP report showed the $1T economy unexpectedly expanded during the first quarter, with consumer inflation expectations rising in June, and the central bank may continue to hold a neutral policy stance going forward as policymakers anticipate economic activity to improve throughout the second-half of the year. The Reserve Bank of Australia held the benchmark interest rate at the 49-year low of 3.00% for the third consecutive month in July, stating that the drop in borrowing costs paired with the expansion in fiscal policy ‘are providing considerable support for demand,’ and the central bank may keep rates on hold going forward as they see ‘further signs of stabilization in the world economy. Moreover, the bank went onto say that ‘the current inflation outlook afforded scope for some further easing of monetary policy’ at a later stage however, market participants anticipate the RBA to tighten policy over the coming months as policymakers expect a ‘gradual recover to begin later in the year.’ Credit Suisse overnight index swaps show investors expect the central bank to raise the cash rate by 75bp over the next 12-months, and long-term expectations for higher borrowing costs may continue to drive the Australian dollar higher as market sentiment improves. Nevertheless, as risk trends continue to dictate price action in the currency market, a rise in risk aversion could weigh on the AUD/USD as the reserve currency benefits from safe-haven flows.
Trading the given event risk favors a bearish outlook for the Australian dollar however, as consumer inflation expectations remain firmly anchored, an enhanced CPI reading could set the stage for a long aussie trade. Therefore, if the annual rate of inflation holds a 2.0% or higher in the second quarter, we will look for a green, five-minute candle following the release to confirm a buy entry on two-lots of AUD/USD. Once these conditions are met, we will place our initial stop at the nearby swing low (or reasonable distance), and this risk will establish our first objective. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to lock-in our profits.
On the other hand, the record-drop in producer prices paired with the slump in global trading is likely to curb inflation throughout the second-half of the year, and price action following the release could set the stage for a short AUD/USD trade. As a result, if the annual rate of price growths falls to 1.0% or lower, we will favor a bearish outlook for the Australian dollar, and will follow the same setup for a short aussie-dollar trade as the long position mentioned above, just in reverse.
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