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Strong China Consumer Price Index (CPI) to Fuel AUDUSD Rate Rebound

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Trading the News: China Consumer Price Index (CPI)

Updates to China’s Consumer Price Index (CPI) may fuel a larger rebound in AUDUSD as the headline reading for inflation is expected to pick up for the third consecutive month.

Image of DailyFX economic calendar

A CPI reading of 2.7% or higher may instill an improved outlook for the Asia/Pacific region even though the U.S. and China, Australia’s largest trading partner, struggle to reach a trade deal, and signs of a resilient economy may spark a bullish reaction in the Australian dollar as it encourages the Reserve Bank of Australia (RBA) to keep the official cash rate (OCR) on hold at the next meeting on July 2.

However, a below-forecast CPI print may push the RBA to further insulate the economy as officials warn that “the downside risks stemming from the trade disputes have increased,” and Governor Philip Lowe and Co. may come under pressure to implement another rate cut sooner rather than later as the “latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year.

In turn, a print of 2.5% of lower may undermine the recent rebound in AUD/USD, with the Australian dollar at risk of facing a bearish reaction as the weakening outlook for the Asia/Pacific region boosts bets for another RBA rate cut.

Impact that China’s CPI had on AUD/USD during the previous release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR

2019

05/09/2019 01:30:00 GMT

2.5%

2.5%

-4

12

April 2019 China Consumer Price Index (CPI)

AUD/USD 5-Minute Chart

Image of audusd 5-minute chart

China’s Consumer Price Index (CPI) increased for the second consecutive month in April, with the headline reading climbing to 2.5% from 2.3% per annum in March. The Produce Price Index (PPI) showed a similar dynamic, with the reading widening to 0.9% from 0.4% during the same period.

The Australian dollar nudged higher following the pickup in China inflation, but the reaction was short-lived, with AUDUSD largely consolidating throughout the day to close at 0.6989. Learn more with the DailyFX Advanced Guide for Trading the News.

AUD/USD Rate Daily Chart

Image of audusd daily chart

  • Keep in mind, the AUDUSD rebound following the currency market flash-crash has been capped by the 200-Day SMA (0.7118), with the exchange rate marking another failed attempt to break/close above the moving average in April.
  • In turn, AUDUSD remains at risk of giving back the rebound from the 2019-low (0.6745) as the wedge/triangle formation in both price and the Relative Strength Index (RSI) unravels.
  • Downside targets coming back on the radar for AUDUSD as the recent advance fails to spur a run at the May-high (0.7061), with the near-term outlook capped by the 0.7020 (50% expansion) region.
  • Waiting for a break/close below the 0.6950 (61.8% expansion) pivot to open up the Fibonacci overlap around 0.6850 (78.6% expansion) to 0.6880 (23.6% retracement), with the next region of interest coming in around 0.6730 (100% expansion).
  • Will keep a close eye on the RSI as it flashes a bearish signal, with the oscillator finally snapping the upward trend carried over from the previous month.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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