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The Q2 CPI print was always seen as the missing piece of information the Reserve Bank of Australia (RBA) needed to assess whether to ease the policy rate in this August meeting. Well, core inflation (annualised) is still 50 basis points under their desired 2-3% target band, but the pace of price growth is actually in-line with their forecasts from the May Statement on Monetary Policy. This means the inflation print was largely expected, but is it enough for them to ease the cash rate to 1.5% or will they hold off for a little longer?
I feel that the RBA will cut rates, but it is a close call. If they don't, then one suspects AUD/USD trades closer to the April highs of $0.7800 in the following days, although if the statement gives off a view that they are eyeing a cut in the coming meetings then we could sellers into this prior high. A close above the June and July highs of $0.7650 would certainly be positive and highlight that the AUD/USD is trending higher – not the sort of environment where I can have any conviction in short positions.
Recall, there is also a barrage of key US data releases this week, culminating in Friday's (22:30 AEST) non-farm payrolls report. The economist consensus is for 175,000 jobs, which is in line with the six-month average. A number below 140,000 would really shake up the USD dynamic, especially given it is now very likely the Federal Reserve will downgrade its growth outlook (again) for 2016 from 2%.
If the RBA cut rates and continue to provide an easing bias, one would expect the July lows of $0.7450 to come into play. I looked at short AUD/JPY trades last week and the trade worked out well, but I would be closing this idea or at least trailing stops. GBP/AUD is at an interesting place given the market is pricing a cut from the Bank of England (BoE) at 100% at this Thursday’s meeting. One suspects the BoE Will have to cut by more than 25bp, or even give a strong indication of restarting its quantitative easing (QE) program to drive the GBP lower. If we look at the two hour chart of GBP/AUD we can see that the market is desperate to find a new catalyst. This week should hold many answers. Trade the break of this range.