Aussie dollar got hammered as inflation weakens

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The Australian dollar is sitting just above 77 cents at 0.7705 this morning after losing 0.95% in the wake of the weaker than​​ expected inflation data yesterday and the resultant postponement of any chance of an RBA rate hike in the next six months.

To recap Q3 CPI released yesterday was a shocker. Whichever way you cut it the only conclusion you can come to is that without the rise in energy prices Australia would have had virtually no inflation at all in the third quarter.

Headline inflation missed to the low side of estimates with a 0.6% print for the quarter and 1.8% rise in prices year on year. Tradeables inflation was down year on year by 0.9% while non-tradables rose 3.2%. In non-economic speak that means Australia is essentially importing low inflation from the globe while domestic factors are still putting pricing pressures on households and businesses in the local economy. It speaks to highly uneven outcomes across the economy.
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RBA not raising rates anytime soon

But the RBA has to manage the economy in aggregate and this headline print and the underlying CPI which rose just 0.35% to leave the year on year rate at 1.9% means there is little to no chance that the RBA will be raising rates anytime soon.

And in a world where forex traders appear to have fully assimilated the outlook for growth, the Fed, and interest rate rises into the US dollar the surprise on the Australian side of the cross knocked the Aussie for six.

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At 77 cents this morning the AUDUSD is sitting at a really important juncture right now. Given positioning data, there is a possibility that this seeling accelerates further if this 0.7685/95 region gives way.

That level is super important. The Aussie hasn’t traded below this moving average since June. A break and hold for a day would be decisive and a signal a deeper retracement may be underway.

That’s why the high level of speculative longs needs to be taken into account.

0.7630/50 then becomes important support with a break of the lower level a signal that the Aussie, like the Kiwi before it, may be about to complete a full round trip of the May/September rally.

That would imply a move back into the 0.73/0.74 region.

But in the same way when last week I wrote the AUDUSD could rally to 0.8050 if 0.79 broke this support at the trendline and 200-day moving average would need to break, let alone the 0.7630 level, to open up this possibility.

​​US dollar up, but not rampaging

In other forex market news, this is not a bull market for the US dollar. Not yet anyway. The reason I say that is because the US dollar is not reacting to positive stimuli in the manner that you would expect if it were a USD bull market. Take last night’s data for example (see above) perfectly good solid data pointing to a good read on the economy when GDP is released tomorrow night. Indeed, Goldman Sachs upgraded their forecast by a tenth of a point and the Atlanta Fed’s GDPNow is still saying a relatively healthy pace of growth at 2.7% is expected for Q3.

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But the dollar is not rising. What’s especially notable about this is that the dollar is not rising event though US 10s are breaking out. Naturally, that UK and European bonds are also rising is also important. But for me when you watch the way Euro reacts to positive data, how the CAD has come under pressure from weaker data flow and then the Bank of Canada (BOC) decision and comments overnight, how the Aussie got pole-axed yesterday on a weak CPI, and how the ebb and flow of Brexit/Economy/BoE feelings drive Sterling then the key forex markets right now is that traders have assimilated the US economy, what the Fed will do, what a Trump tax cut may wreak and are instead focusing on the other side of the pairs against the USD. That’s entirely appropriate given that traders believe they have a clear picture of the US side – the Fed, growth, and tax cuts. It’s the other side where the volatility is. So it’s not a bull market for the USD – not across the board – but it is in some pairs.

Looking at the main moves overnight Euro is up 0.4% to 1.1807 after German Ifo business data shot the lights out and showed again – as if we needed further confirmation – that the Euro is not a handbrake on business or economic activity in Europe’s largest economy. GBPUSD is up as well after the 0.4% GDP print was a little better than expected. That data turbocharged Sterling which is up 0.9% again the USD at 1.3248 and half a percent stronger against the Euro with EURGBP at .8908. GBPUSD is breaking out of its recent downtrend.

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​​Canadian dollar slightly lower as rates stay on hold

The CAD lost a little more than one percent against the US dollar overnight and more against the Euro and pound after the BoC left rates on hold and delivered a dovish statement and press conference. The bank highlighted “substantial uncertainty” for the Canadian economy around the NAFTA negotiations and said while the economy is operating near potential there is still slack in the labour market.

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