AUD USD Tumbles as Australian Inflation Misses its Mark

The Australian Dollar to US Dollar (AUD/USD) exchange rate tumbled almost 1% this morning on upbeat US durable goods order figures and a disappointing Australian inflation print.

AUD Exchange Rates Tumble as Australia’s Headline Inflation Proves Limp

A disappointing Australian inflation reading left investors struggling to find reasons to invest in the ‘Aussie’ Dollar this morning, with the release further diminishing the possibility that the Reserve Bank of Australia (RBA) will move for a rate hike next year.

Consumer prices in Australia jumped 1.8% on the year in the third quarter, down from the previous period’s 1.9% and below the market forecast of 2.0%.

This was the lowest rate of inflation Australia has demonstrated since the December quarter of 2016, with markets citing the drop in the prices of food as the predominant reason for the fall.

House prices and transport, however, continued to increase.

On a quarterly basis, consumer prices inched up by 0.6%, faster than the 0.2% gain in Q2 but still below the market forecast of a 0.8% rise.

Today’s inflation print is also notable in that there’s very little on the horizon that could perceivably nudge the figure back into the bank’s target range of 2-3%.

Chief Economist at AMP Capital Shane Oliver shared this sentiment, stating:

‘There is no imminent RBA interest rate hike here’.

Justin Smirk, an Economist at Westpac stated:

‘Broadly speaking the Australian economy appears to be locked in a low inflation environment. At this stage we struggle to find any broad cyclical upswing in prices’.

This outlook has severely limited demand for the Australian Dollar, allowing its US counterpart to take the lead.

USD Exchange Rates Bolstered by Robust US Durable Goods Orders

The ‘Greenback’ remains on good form today following news that the number of durable goods orders in the US increased by more than forecast in September.

Durable goods orders (the value of orders placed for long lasting goods) increased by 2.2%, significantly above August’s 1.0% increase and indeed the forecast of 2.0%.

This rise resulted from a concentrated increase in the order of military hardware, commercial aircraft and electronics, ultimately pointing to a resurgence in American manufacturing in 2017 that has been aided by robust demand at home.

Beyond this, recent statements from Fed Chairman Janet Yellen that the economic damage of Harvey and Irma would be temporary seem to have been quantified, leaving markets increasingly invested in the prospect that the Fed might move for a third and final rate in in 2017.

In other news, yesterday’s IHS Markit flash estimate for US service ‘business activity’ climbed from 55.3 in September to 55.9 in October – above the market forecast of 55.6 and marking the second-fastest rate of expansion seen since November 2015.

The manufacturing flash estimate also demonstrated a rise from 53.1 to 54.5 – a nine-month high, whilst the composite reading jumped from 54.8 to 55.7, above the forecast of 54.3.

AUD USD Outlook Gloomy as Fed Deemed More Hawkish Option than the RBA

The outlook for the AUD USD exchange rate has grown increasingly gloomy today, with Australia’s disappointing inflation print expected to leave the RBA dovish.

The Federal Reserve, on the other hand, has repeatedly suggested that it could move for another rate hike in 2017 (as initially planned), though this ultimately remains dependent on the performance of US inflation readings between then and now.

Markets will be watching tomorrow’s run of US data releases, with the advance goods trade balance figures for September liable to cause some movement. This release is currently forecast to drop from -$63.3b to -$64b; a widening deficit that could put the ‘Greenback’ under pressure.

This pressure is unlikely to be enough to reverse the US Dollar’s lead in the AUD USD pairing, however, with demand for the ‘Aussie’ Dollar likely to continue to diminish in the near-term.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

Contact Adam Solomon