Forex Signal (Tue October 26 2010, 8:30pm NY Time EDT) - AU CPI q/q

Henry Liu

Former FPA Special Consultant
Our plan to trade today’s CPI release out of Australia will be to look for opportunities for entry if we get a surprise in this release, here is the current forecast:

8:30pm AU CPI q/q Forecast 0.8% Previous 0.6%

The Trade Plan
Here is the plan, if we get a better than expected CPI data, we should see an instant appreciation of AUD by at least of 40 pips within the hour, but if we get a worse than expected number, AUD should drop and we should expect the market to consolidate. Of course, the deviation that I am looking for must be at least 0.2~0.3%, or I will skip the after news trade…

On a minimum release of 1.1%, I would buy AUD/USD after a decent retracement. If we get a 0.5% or worse release, I'd SELL AUD/USD immediately, I would consider a spike trade on a worse than expected release as recent gains in the AUD is screaming for a strong correction.

For more information on my trading methods, please read:
Henry Liu's Trading Methods

The Market
The quarterly CPI release is showing that Australia is facing rise in inflation, and if this number surprises to the upside, we could see steady demand for AUD, at least temporarily. RBA has paused rates hikes for several meetings and with a surprise higher release, expectations for further rate hike from RBA could return.

With the quarterly PPI at 1.3%, which is the highest reading in almost 2 years, traders are definitely looking for a stronger CPI release, but of course, the focus will be on RBA's rate decision on November 2, or Wednesday of next week. The key would probably rests in the global uncertainties versus inflationary pressure, as most G7 central banks are currently taking a "wait-and-see" approach (very much like Canada BOC).

Additional Thoughts
Inflation could be a real concern for Australia as unemployment drops and supplies for skilled workers also drop, wages gain will be the next step as long as the mining boom remains active. This will add pressure to RBA for further rate hikes, but at the same time, RBA is also considering its bubble economy that's highly dependent of China's commodity demands.

Current Sydney Futures Exchange pricing in about 70% of probability for November 2 rate hike, the only thing standing in between is this CPI release, which may confirm or reduce speculation of RBA policy.

Pre-News Consideration
We may get a chance to go LONG on AUD/USD on the expectation of a strong CPI release. However, with AUD/USD trading at the top of the range, it may be best to sit this one out, but if you are looking for direction on the AUD/USD for the short-term until the CPI release, I'd bet on going LONG after it dips to support areas based on 4 hour chart.

“The Consumer Price Index (CPI) measures the rate of inflation (i.e., the rate of price changes) experienced by consumers when purchasing goods and services. A rising trend has a positive effect on the nation’s currency. The primary objective of the central bank is to achieve price stability; when inflation rises above an annualized rate of approximately 2%, they will respond by raising interest rates to bring prices down. Higher interest rates attract foreign investment, thus increasing demand for the nation’s currency. CPI is one of the most closely watched indicators and will usually have a high impact upon release.”

Click here for historical chart and data on AU CPI q/q


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