The latest inflation update out of Australia will hit the markets at 00:30 GMT Wednesday. Forecasts point to a muted print, though that is unlikely to result in further action from the RBA, which recently cut rates and expanded its QE program. As for the aussie, with the RBA on the sidelines, its performance will depend mostly on global risk sentiment, the vaccine rollout, and the final size of the US relief package. The main downside risks are the possibility of a vaccine-resistant covid mutation and the diplomatic brawl with China.
RBA is a sideshow
The Australian economy continues to heal its wounds at a rapid pace. The recovery in the jobs market has been more powerful than expected and consumption has bounced back well. Virus numbers remain very low, which has allowed the economy to stay open and has given consumers and employers more confidence.
Despite the encouraging developments, the Reserve Bank of Australia (RBA) still delivered another round of stimulus back in November. Policymakers argued that the additional liquidity will help to accelerate the recovery, mainly by driving borrowing costs lower and by keeping a lid on the exchange rate.
The last part is crucial. The RBA is worried that the relentless rally in the aussie this past year will ultimately stifle growth and inflation. It wants a weaker currency, and it was willing to use its final ‘rate bullet’ to make that happen. But funnily enough, the opposite happened. The aussie has gained dramatically since the November rate cut, mostly because of the vaccine news and the rally in commodity prices.
This implies that what the RBA wants is almost irrelevant if it doesn’t have the firepower to back it up. Policymakers can talk the currency down, but any retreat will be short-lived if markets sense there is no real action behind the threat. Hence, the aussie’s fate is mostly at the hands of global forces.
Muted inflation print unlikely to change much
Turning to the upcoming data, the yearly CPI rate is expected to have held steady at 0.7% in Q4. Similarly, the trimmed mean CPI rate is forecast to remain unchanged at 1.2%, though the weighted mean is projected to have dipped to 1.2% from 1.3% previously.
However, in its latest forecasts, the RBA expected the Q4 inflation print at 0.5%, so a number closer to 0.7% could even be considered a positive surprise. Either way, it is unlikely to spark any major reaction.
Aussie is tied to global economy
As for the aussie, the overall picture still seems favorable. The domestic economy is solid, and the RBA is unlikely to ease any further. Meanwhile, stock markets continue to power higher, iron ore prices remain elevated, the US is about to go on a federal spending spree, and the global vaccine rollout is progressing decently.
It is not all rosy, however. There is a danger that the existing vaccines may not be effective against all the new mutated covid variants that scientists are discovering. If even a single variant proves resistant to vaccines, that could deal a major blow to the narrative that things are about to return to normal, and by extension impact the aussie.
Another risk is the ‘mini trade war’ with China. China is Australia’s biggest trading partner, and recently it has been imposing tariffs on Australian products. Even though this brawl is mostly symbolic so far, hence why the market hasn’t reacted, it is something to keep a close eye on.
Taking a technical look at aussie/dollar, initial resistance to advances may be found near 0.7780, with an upside break opening the door for another test of 0.7820. In case of a retreat, preliminary support could come from the 0.7670 region, which also encapsulates the 200-period moving average. A break lower would turn the focus to the 0.7640 zone.
