AUD/USD weekly outlook: Quarterly CPI to decide on Feb cut

Wednesday’s inflation figures are the standout event for RBA watchers, as it could decide whether the RBA pull the trigger and cut rates in February. While money markets are placing a 79.2% probability of a cut next week, the revival of dovish bets resurfaced following the release of the January CPI figures early this month – which need to be confirmed with the quarterly figures. Trimmed mean CPI slipped to 3.2% y/y, just 0.2 percentage points above the RBA’s 2-3% target. Yet other measures of CPI ticked higher within the RBA’s band, and they want to see inflation is sustainability within the band anyway.

Trimmed mean is expected to soften to 3.3% y/y in Q4, down from 3.5%. But unless it dips closer to or below 3%, I suspect the RBA will stand pat in February, given their ‘reserved’ nature to any rate decision.

As I said at the time, “I believe odds of a February cut remain too high given the fall in unemployment and that fact that we’re yet to find out how inflationary the Trump administration could really be. Besides, the RBA will wait for the quarterly inflation figures released January 29, before deciding whether to cut in February”. Employment data since has hardly rolled over, with participation equalling its record high in December with 56.3k jobs added, even if unemployment ticked higher to a respectable 4%.

Attention then shifts to the US with Q4 GDP, the first FOMC meeting of the year and PCE inflation data for January. I expect Q4 growth figures to remain robust and that the Fed will hold rates, given the 97.3% odds of inaction on Fed Fund futures and that there is only a 45% chance of the first cut arriving in June. And as there are no updates to the staff forecasts, traders will scrutinize the statement and wording used by Powell in his press conference for any subtle changes to the Fed’s stance. My guess is that they will keep their cards close to their chest and not sway too far from prior communications. And any changes to market expectations are likely to come down to which half of the year a single cut may arrive.

AUD/USD correlations:

• Then strong, positive correlation between the Chinese yuan and Australian dollar remains in place across multiple timeframes
• Yet the near-term 3-day correlation is also strong with commodities, particularly metal and crude oil
• As the ASX 200 mostly tracked the Dow Jones (and therefore looked past the tech selloff on Wall Street), there is now a strong inverse correlation between the ASX 200 and AUD/USD over the near term

AUD/USD futures – market positioning from the COT report:

• Large speculators decreased their net-short exposure to AUD/USD futures for the first week in nine (-6.3k contracts)
• They increased longs by 19% (5k contracts) and reduced shorts by -1% (-1.3k contracts)
• These are hardly bullish figures, but it does bolster the case that AUD/USD is oversold after its strong selloff since the October high

AUD/USD technical analysis

The tech selloff on Monday weighed on appetite for risk and therefore AUD/USD, which finds itself down for a second day halfway through Asia’s trading session. But AUD/USD is holding up relatively well compared to the strong losses of the technology stocks, particularly in the semiconductor space. There is also the risk that trimmed mean CPI is not soft enough to warrant the current pricing of a Feb cut, which could send AUD/USD higher.

I suspect we’re amid a pullback against the rally from the January low, so bulls may want to patiently wait for such dips and try to identify swing lows, However, they should also keep an eye on USD/CNH, as a top is required on the pair before AUD/SUD can continue higher (assuming the strong correlation between the yuan and Aussie dollar persists).

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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