Fundamental Event:
Australian producer prices climbed 0.8% in the 2nd quarter compared to the 1st, and was up 3.4% compared to the 1Q in 2010.
Producer prices rose at a faster quarterly pace in the 1st quarter ? at 1.2% ? but the annual rate pushed up 3.4% from the 1st quarter?s reading of 2.9%.
That change was widely expected, and therefore has so far had a muted reaction in currency markets.
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Impact on Markets:
The AUD/USD pair falls back from its highs set later Friday at 1.08874, and the release gave the AUD/USD a slight boost, with the pair finding short term support at 1.0818.
The AUD/NZD hit fresh intra-day lows after the release and was trading near 1.2506 in early Asian session. That tests an upward sloping trendline formed from connecting the lows in teh pair on July 18th with that the low on July 20th. A break, can open up further losses for hte pair, which would extend the gains in favor of the kiwi we saw mid-month.
The EUR/AUD moved in favor of the EUR, pushing to the the 1.33 area. However it stalled out there follownig the release, though the pair is up about 50 pips from Friday?s close.
The GBP/AUD was trading slightly higher from its Friday close as well, reaching 1.5070, but it too did not find much direction in the wake of the PPI release and has been in ranged trading over the past few sessions.
Why is this Important:
The PPI measures prices at the factory or farm level, as they leave those sources of production. Therefore its up to the wholesaler and then the retailer to decide whether to pass those prices along to their conusmers. The PPI therefore acts as a leading indicator for CPI.
We get the quarterly CPI reading Tuesday evening EST, or Wednesday morning Australia time.
The RBA will be on alert for an elevated reading from the CPI, as higher expectations for inflation can turn into faster wage or second-round price rises which would require further action by the central bank.
Currently the bank is in a wait-and-see mode, and in general expectations for inflation seems to depend on who you ask?
For instance one Bloomberg article titled Inflation Bond Gauges at 2011 Low as Economy May Falter: Australia Credit says:
?Investor expectations of Australian inflation dropped to the least this year on prospects faltering growth will cool consumer-price gains, giving the central bank scope to extend its longest interest-rate pause since 2007.
The so-called breakeven rate on 10-year inflation-linked notes fell nine basis points, or 0.09 percentage point, this month and touched 274 basis points, the least since November. The rate reached a four-year high at 306 on May 11. The one-year inflation swap rate touched 2.67 percent on July 20, the lowest in almost 15 months, and slid 61 basis points in the three months to June 30, the biggest quarterly drop since 2008.?
While another Bloomberg article over the weekend titled RBA to Raise Rates Three Times in Coming Year on Mining Boom, Access Says says:
?Australia?s central bank will increase�interest rates three times in the coming year as a mining boom boosts wages and helps the economy recover from natural disasters, a Deloitte Access Economics report showed.
High resource prices and strong demand will boost Australian incomes and there won?t be enough workers to satisfy jobs growth, and that will push up wages, the Business Outlook report released in Canberra said.
?That boils down to a strong demand-weak supply scenario of the kind that makes central bankers sweat,? the research company said, forecasting ?three official interest rate increases in the coming year ? though none in the next little while.??
With competing narratives out there for what the RBA will do, and how inflation and price pressures will behave, it will be important to keep our eye on Wednesday?s CPI report.
CPI is expected to show a 0.7% increase in the 2nd quarter compared to the 1st, and to climb to 3.4% in annual terms.�In the 1st quarter, prices rose a steep 1.6% on the quarter, and posted a 3.3% annual rate.
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Nick Nasad
Chief Market Analyst
FXTimes
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart�analysis.
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