Australia’s Q4 CPI report showed a 0.8% rise on quarter, much better than the 0.4% rise the market was looking for. On-year, CPI came in at 2.7% while the trimmed mean reading was at 0.9%. This was the largest rise in the trimmed mean since Q2 2011 and the annual reading of 2.6% now lies in the top half of the RBA’s target band. This hasn’t happened in a few years. The market was certainly positioned for a benign CPI print and therefore there was a swift unwinding of AUD shorts as the data hit the wires.
AUD/USD surged to the 0.885 region and continues to carry some positive momentum. Of course the question now is how this impacts the RBA’s opinion on rates. While I don’t feel this changes much as far as rates are concerned, it certainly goes a long way towards calming disinflation fears. This reading might put more pressure on the RBA from an AUD perspective, as ideally the central bank would want to see a weaker AUD. As it stands we are at mercy of the Fed and its stance on tapering which could help weaken the AUD/USD pair. Once we have more information from the Fed, then the RBA can assess the situation at the February meeting.
Still room for shorts on strength
From a trading perspective though, there is still room for shorts in the AUD on strength. The region between 0.885 and 0.89 presents significant resistance after having seen some consolidation in the past. The 0.888 level is also the 38.2% retracement of the drop from highs above 0.90 in mid-January until the low from this week below 0.88. This could tempt short-term traders to eye shorts in the near term. The sharp drop in iron ore prices will also be a potential driver of further downside for the AUD in the short term.