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Aussie Soars as Core Inflation Exceeds Estimates

H.S. Borji
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Aussie Soars as Core Inflation Exceeds Estimates

The Australian dollar strengthened against its US counterpart Wednesday, as stronger than forecast core inflation reaffirmed expectations the Reserve Bank of Australia won’t reduce interest rates further in the months ahead.

The AUDUSD advanced for a second consecutive day, climbing 0.59 percent to 0.9450, its highest level since early July. The pair is likely supported at 0.9361, just above the 50-day exponential average. Initial resistance is likely found at 0.9194, the 200-day simple moving average.

The AUDUSD pair has advanced nearly 0.9 percent since July 17.

In economic data, Australia’s core consumer prices advanced at a faster rate than forecast in the second quarter, creating a potential roadblock for future monetary easing at the hands of the Reserve Bank of Australia.

The trimmed mean consumer price index increased at a rate of 0.8 percent between April and June, following an increase of 0.6 percent the previous quarter, Australia’s Bureau of Statistics reported today. A median estimate of economists called for a quarterly gain of 0.6 percent.

The trimmed mean CPI accelerated at an annual rate of 2.9 percent in the second quarter, following an annualized gain of 2.6 percent in the first quarter.

Australia’s consumer price index increased at an annual rate of 3 percent in the second quarter, up from 2.9 percent.

Stronger than forecast core inflation probably reduces the likelihood of another rate cut in the near-term, as the RBA seeks a “period of stability” to promote recovery amid a broad slowdown in mining investment. The central bank has held interest rates at a record low of 2.5 percent for eleven consecutive months. The RBA has reduced the cost of borrowing by 2.25 percentage points since late 2011.

According to speculators, the RBA will refrain from further action for at least the rest of the year, even though inflation is at the upper end of the central bank’s target.

The Australian dollar advanced nearly 2 percent last quarter, but faced bearish pressure this month after RBA Governor Glenn Stevens said the local currency was overvalued, “and not by just a few cents.”

In other trading, the Aussie continued to rebound against the New Zealand dollar, as the AUDNZD advanced 0.36 percent to 1.0877. The pair is back to trading around its long-term trend and is trending just below the 200-day moving average. Initial support is likely found at 1.0794. On the upside, initial resistance is likely found at 1.0899, the high from June 12.

The Reserve Bank of New Zealand on Thursday is expected to announce its fourth rate hike in as many meetings, as policymakers look to stay ahead of the inflation curve. The RBNZ has raised the cost of borrowing by 25 basis points in each of its last three meetings.

The Aussie surged against the Japanese yen, as the AUDJPY climbed 0.61 percent to 95.90. The pair, which is trading above its long-term average, is testing initial resistance at 95.93. On the downside, initial support is likely found at 94.98.

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