We have two big events for Aussie this week.
In our first Asia session for the week ABS will be releasing the revised weights for CPI and then in our second Asia session for the week we have an RBA rate decision.
Westpac has reported that in previous reports we have seen a reduction of 0.2 percentage points over the year. The reweighting of CPI is a five-year event though will now be revised every year.
“Westpac expects the revised weights to reduce the outlook for inflation over 2018 by 0.4 percentage points for headline inflation and 0.3 percentage points for underlying inflation. Note that historical inflation estimates will not be affected.” Read more
What’s important is how this going to feed into the interest rate decision. We know from the meeting minutes of the October meeting that the RBA is feeling positive about employment growth though are concerned about low wage growth and high household debt. Australia is not at full employment yet and the RBA sees the remaining spare capacity subduing wage growth and inflation. The RBA also commented on a high exchange rate due to a weaker Dollar contributing to lower inflation slowing the pick-up in economic activity.
Therefore, the re-weighting of CPI is quite important. The RBA are going to remain on hold until the economy is at full employment (around 5% NAIRU) and data shows an improvement in wage growth and an increase in inflation between 2 and 3 percent. If the re-weighting reduces the outlook for inflation, then that means on hold for longer.
With unemployment at 5.5%, wage growth YoY flat at 1.9%, core inflation flat at 1.8% and inflation at 1.8%, the lowest inflation rate since the December quarter 2016, the RBA do not have the ammunition to hike and it looks like Westpac may have a point regarding ABS. If so then we are going to get Aussie weakness. Currently, we do not have a technical setup for Aussie weakness so keep an eye on resistance as we head closer to the release of the data and the RBA meeting. I don’t know what time the data is being released though it is during today’s Asia session.
ABS is a news scalp and an opportunity to move in the market direction during London and New York as we head into the RBA meeting on Tuesday. Paying attention to price levels before the RBA release will be key in determining whether to take profit just before the release or to add positions on a second news scalp. Due to the high volatility of both these releases, it does seem likely for Aussie pairs to reach profit taking zones by Tuesday and may provide a counter-trend trading opportunity for the remainder of the week.