Hot CPI Data Shield Australian Dollar From Stock Market Losses

The AUD/USD pair is stable in the 0.7140 area on Tuesday after Monday’s brief dip below 0.7100. Hotter than expected Australian CPI data is helping shield AUD from further risk appetite-related losses as US equities slide.

After coming within a fraction of hitting the December 20 lows just above 0.7080 on Monday but then subsequently recovering back to the 0.7150 area as Wall Street recovered, AUD/USD has remained resilient and trades flat near 0.7140 on Tuesday.

Despite sentiment in US equity markets taking a turn for the worse again, which weighed on the pair this time on Monday. Stronger than expected headline US Consumer Confidence figures for January have also not been able to weigh substantially on the pair that has held in the 0.7120-0.7160ish ranges for most of Tuesday’s session.

The Australian dollar is finding support following a hotter than expected Q4 2021 Consumer Price Inflation report out of Australia that showed the headline rate rising from 3.0% in Q3 to 3.5% versus forecasts for a rise to 3.2%.

Importantly, the RBA’s Trimmed Mean measure of inflation rose to 2.6% from 2.1%, much larger than the expected jump to 2.4%, putting core inflationary pressures back above the midpoint of the RBA’s 2-3% target range two years earlier than the central bank forecast.

The data helped to stoke RBA tightening bets, thus helping to underpin the Aussie and shield it from the risk appetite-related downside being seen in its antipodean counterpart NZD on Tuesday.

Despite current RBA guidance that there will be no rate hikes until late-2023/2024, money market futures are now nearly pricing a 15bps rate hike in full by May.

Next week the RBA will likely end its QE and bring forward the timing it expects to begin raising rates from late-2023/2024 (according to its current forecasts) to firmly into 2023. At this stage, the RBA is unlikely to give up its forecast of no rate hikes in 2022 until it sees wages data in February.

If the RBA’s meeting next week underwhelms market expectations for a hawkish shift and a signal for rate hikes in 2022, that suggests downside risks for AUD/USD, a cross already hampered recently by deteriorating risk appetite and a strengthening dollar. Bears will be looking for a more sustained break below 0.7100 in the coming days/weeks which would open the door to a move towards December lows at 0.7000.