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Is the worst behind us? Higher Australian CPI provides some room to the RBA

The Australian dollar surged against the US dollar in overnight trading in reaction to a pickup in inflation. The consumer price index printed at 1.7%y/y in the fourth quarter, beating estimates of 1.6% and previous reading of 1.5%, while the trimmed mean inflation measure came in line with median forecast and remained stable at 2.1%y/y. The data showed that the pickup is mostly attributable to the effects of the currency depreciation as the price of tradable goods rose 0.8%y/y from -0.3% in the previous quarter. The Australian dollar jumped 0.60% to 0.7040 on the news and stabilised around that level. Overall, we maintain our short-term positive bias on AUD/USD. On the upside, a strong resistance can be found at 0.7382 (high from December 12th), while on the downside, the low from January 15th will act as support (0.6827).
***Yann Quelenn, market analyst: “Higher Australian CPI provides some room to the RBA: A week before the Australian rate decision, the consumer price index was released last night higher than expectations at 1.7% y/y vs 1.5 y/y. We must say that the continued decline of the Australian dollar versus the greenback has ,in our minds, sent inflation higher. In 2015, the AUDUSD lost almost 13% of its value. The cost of imported items has increased and the current CPI increase is consequently mostly due to the weakening of the currency. Nonetheless we have to note low commodities prices are still largely weighing on the Australian economy. Yet, we remain optimistic as the demand for Australian commodities is far from being weak. Next week, the Reserve Bank of Australia will fix its Cash Rate Target. We believe that it should remain at 2%. Markets are pricing in a 94% likelihood that the rates will be kept on hold. The central bank is achieving its dual mandate; inflation is growing and jobs market conditions are largely improving. In 2015, around 300k jobs were added to the market and the unemployment rate is holding at 5.8%.”***
The Federal Open Market Committee will deliver its interest rate decision later today. It is widely accepted that the Fed will stay on hold today. However, the market expects to get some insight regarding the tightening path of the Federal Reserve as well as the effects of the January turmoil on Fed thinking. The US dollar has been losing market interest since the beginning of the year, which is consistent with the downward shift of the entire yield curve. After bouncing back on the 1.08 support, EUR/USD is on its way to the 1.09 level, the closest resistance lies at 1.10.
In the equity market, most Asian regional indices were able to stay in positive territory. Japanese stocks rose sharply after Wall Street gains; the Nikkei was up 2.72%, while the broader Topix index rose 2.98%. Hong Kong’s Hang Seng increased by 1.03% to 19,055 points. On the other hand, China’s mainland stocks were unable to enjoy the positive lead and ended up wearing red with the Shanghai and Shenzhen Composite down 0.52% and 0.83% respectively. Elsewhere, in Singapore the STI rose 0.37%, the Thaï BGK surged 1.37% and the Indonesian JCI was up 1.24%.
In Europe, futures on major indices are pointing to a lower open as crude oil suffered another blow. WTI is down 2.58%, while its counterpart from the North Sea fell 2.14%. The Euro Stoxx 600 was down 0.44%, the Footsie fell 0.24%, the DAX 0.28% and the SMI -0.41%. In spite of this negative performances, we have the feeling that the worst of the volatility is behind us, returning to lower levels and equities able to move higher in spite of weaker crude oil.
Today traders will be watching consumer and business confidence from Italy; MBA mortgage application, new home sales and FOMC rate decision from the US; trade balance, export, import and interest rate decision from New Zealand.

Wednesday, 27 Jan, 2016 / 10:32

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