AUD Outlook Brightens As Inflation Seen Returning To Target For First Time In Two Years

If consensus forecasts are correct, Australian inflation will sit at the lower bound of the 2% to 3% target, which may prompt a gradual repricing of Reserve Bank of Australia rate expectations. 

Australian inflation is expected to return to its target for the first time in more than two years when September figures are released Tuesday.

Headline consumer price inflation is seen rising 0.8% when compared with the previous month and at an annualised pace of 2%. Strikingly the core-CPI, or trimmed mean CPI as it is known in Australia, is also seen rising at an annualised rate of 2% for September.

Trimmed mean CPI strips out the most volatile items from the consumer price basket, items such as energy and food, and so its increase to the 2% threshold is symbolic of firmer underlying inflation pressures.

“While we do not think that this alone will compel the RBA to shift to a more hawkish stance, it nonetheless plays into our view that AUD is one of the most underappreciated but very compelling macro stories and candidates for a sustained upside move,” says Mazen Issa, a strategist at TD Securities.

Risks around Tuesday’s CPI numbers are to the upside, according to Issa, as a summer surge in utility prices does its work on the price basket. Assuming the consensus forecast of economists is correct then Australian inflation will sit at the lower bound of the 2% to 3% inflation target.

“We rather think that the RBA would like to see underlying inflation progress further to the mid-point of the target range before feeling comfortable in delivering its first hike since 2010,” says Issa.

Expectations for Reserve Bank of Australia monetary policy have been mixed of late, with some strategists suggesting a hike might come in 2018, while others suggest the RBA may wait a bit longer before withdrawing stimulus from the table. To date, the RBA has left the cash rate unchanged at a record low of 1.5% for 14 months running. 

The central bank has repeatedly raised concerns over rising household debt levels and how this might impact upon the economy, suggesting it might prefer to wait until wage growth rises a bit more before hiking rates.

“Nonetheless, this CPI report along with next month’s employment and quarterly wages—both of which are poised to turn higher—sets the stage for what we think could be a material repricing of RBA expectations which is far too understated (currently the first rate hike is not priced until Q3-2018),” says Issa.

The Aussie Dollar saw a mixed performance in London Tuesday, rising against the Pound, Swiss Franc and Japanese Yen but falling against the Euro and US Dollar. The Pound-to-Australian-Dollar rate was quoted 0.12% lower at 1.6878 shortly after the London close.