Skip to content

CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved. CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.

Market update: Australian dollar jumps on shocker CPI data; will AUD/USD go higher on an RBA hike?

The Australian dollar found legs after CPI figures beat Q3 forecasts; both the headline and trimmed measures revealed tight price pressures and the RBA might be looking for a move. If they lift rates, will AUD/USD get a boost?

Source: Bloomberg

Australian dollar reacts to CPI figures

The Australian dollar made gains in the aftermath of headline CPI of 5.4%, beating forecasts of 5.3% year-on-year to the end of September against 6.0% previously.

Perhaps crucially, the September quarter-on-quarter headline CPI was 1.2% rather than the 1.1% anticipated and 0.8% prior. This represents a re-acceleration of price pressures.

The RBA’s preferred measure of trimmed-mean CPI was 5.2% year-on-year to the end of September instead of estimates of 5.5% and 5.9% previously. The trimmed mean quarter-on-quarter CPI read of 1.2% was above the 1.0% forecast and prior. Today’s CPI is undeniably undesirable, especially for the RBA’s preferred trimmed mean measure.

Commentary on annual and quarterly CPI

Some commentators are at ease about today’s CPI, citing that the annual number has decreased. This decrease in the yearly figure is the base effect, rather than an indication of the current state of play. Quarter-on-quarter headline CPI for 3Q 2022 was 1.8%.

What is the next move for RBA?

The problem for policymakers is that inflation has been reignited over the third quarter. The lead-up to today’s CPI figure saw an intriguing run of commentary from the RBA.

  • Wednesday 11th - RBA assistant Governor Chris Kent said, “Some further tightening may be required to ensure that inflation, that is still too high, returns to target.”

  • Tuesday 17th October – RBA October meeting minutes published and stated, “The Board has a low tolerance for a slower return of inflation to target than currently expected. Whether or not a further increase in interest rates is required would, therefore, depend on the incoming data and how these alter the economic outlook and the evolving assessment of risks.”

  • Wednesday 18th October - RBA Governor Michele Bullock said, “The problem is we’ve had shock after shock after shock. The more that keeps inflation elevated, even if it’s from supply shocks, the more people adjust their thinking.”

  • Tuesday 24th October - RBA Governor Michele Bullock said in regards to getting inflation down, “It is possible that this can be done with the cash rate at its current level but there are risks that could see inflation return to target more slowly than currently forecast. The Board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation.” She also restated, “The Board has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected.”

The real cash rate and its implications

Looking at the chart below, published by the RBA earlier this month, two aspects stand out. First is the depth of the negative real cash rate and second, the large gap between the real cash rate and the return on the 90-day Bank Bill. The real cash rate is the RBA’s cash rate target less the headline inflation rate (CPI).

Negative real interest rates: who pays the price?

Negative real interest rates undermine the wealth of the nation with today’s money being more valuable than cash in the future. Savers in particular are most punished by these circumstances.

Of course, we know the answer is simple. The two-ways to correct the situation are by lifting interest rates or by getting inflation down. The chart reflects the recent achingly high inflation reads relative to the last 30-years, since inflation targeting was mandated by the Australian Government to the RBA.

Source: ABS, AFMA, ASX, RBA

Inflation target maintained

That mandate went through a review process under the current government and some tinkering was undertaken.

Of significance is that the inflation target has been maintained. Today’s reacceleration of price pressures depresses the real cash rate further. The longer inflation stays high and interest rates are unchanged, the more damage is done to the economy in the long run.

Market expectations for RBA rate hike

Going into today’s data, the interest rate futures markets ascribed close to a 0% probability of a 25 basis-point hike by the RBA at their monetary policy meeting on November 7th. The dial moved slightly toward a possible of a hike post-CPI. Then again, the market did not anticipate the first hike by the RBA in May 2022. The pandemic is mostly consigned to the history books, but inflation is still with us and growing.

Former RBA Governors have previously said, in the overall sense, that 25 basis points is here nor there for monetary policy. If the RBA does not hike at either the November or December meetings, then the next opportunity will not be until February.

An early insurance policy for the new Governor might be in the offing.

AUD/USD short term reaction to CPI beat

Source: Bloomberg

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. Please see important Research Disclaimer.

Please also note that the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

Explore the markets with our free course

Discover the range of markets you can spread bet on - and learn how they work - with IG Academy's online course.

Turn knowledge into success

Practice makes perfect. Take what you’ve learned in this index strategy article, and try it out risk-free in your demo account.

Ready to trade indices?

Put the lessons in this article to use in a live account. Upgrading is quick and simple.

  • Get fixed spreads from 1 point on FTSE 100 and Germany 40
  • Protect your capital with risk management tools
  • Trade more 24-hour markets than any other provider – 26 in total

Inspired to trade?

Put the knowledge you’ve gained from this article into practice. Log in to your account now.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Tuesday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.