AUD/USD and NZD/USD Fundamental Daily Forecast – Aussie Retail Sales Surge in November, Inflation Resumes Rise

Australian Bureau of Statistics data showed on Wednesday that the Consumer Price Index (CPI) advanced 7.3% seasonally adjusted from a year earlier, up from 6.9% in October and higher than the 7.2% median estimate. Additionally, retail sales surged by 1.4% in November, more than double forecasts.

The Australian Dollar inched higher after the news but stayed within Tuesday’s range amid uncertainty ahead of the U.S. Consumer Price Index (CPI) report on Thursday that could set the tone in the financial markets for several weeks.

At 08:04 GMT, the AUD/USD is trading .6904, up 0.0011 or +0.16% and the NZD/USD is at .6369, down 0.0001 or -0.01%. On Tuesday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $68.43, up $0.03 or +0.05%.

Rate Hike Bets Firm after CPI Report

Three-year government bond yields also rose as RBA policymakers have said future rate hikes will depend on incoming data on inflation and employment. The central bank’s rate-setting board is scheduled to hold it first meeting of 2023 on Feb. 7.

Financial futures are showing that traders firmed up bets on a 25-basis point rate hike after the release of the CPI and Retail Sales data. The odds are now better than 80% that the RBA raises rates by that amount.

The increased wagers also indicate that the RBA will push its benchmark rate to about 3.9% later this year.

The RBA is currently in the middle of an eight-month tightening cycle that has so-far lifted the cash rate to 3.1% from a record-low 0.1% in May as it joins global counterparts in trying to tamp down price gains.

Consumer Inflation In Line with RBA Expectations

Although the pace of consumer price inflation was faster than anticipated, the result is in line with RBA policymakers’ expectations that inflation peaked late last year. It forecasts an 8% rate in the fourth quarter, with data for the three-month period due out in two weeks’ time.

In addition to the headline reading, today’s annual CPI report showed core prices, or the trimmed-mean gauge climbed 5.6% in November compared with a forecast of 5.5%. This put core inflation at its highest since 2018.

Short-Term Outlook

The reaction to the Australian inflation data has been muted so far with investors clearly focused on Thursday’s U.S. Consumer Price Index (CPI) report.

Thursday’s CPI data could determine the direction of the AUD/USD and NZD/USD for several weeks.

If U.S. inflation were to come in below expectations or was below the November reading, Treasury yields would tumble and the U.S. Dollar would weaken. The weaker greenback would be supportive for riskier currencies like the Australian and New Zealand Dollars.

Consensus forecasts are for headline U.S. CPI inflation to drop to 6.5% in December from 7.1% in November and for ‘core’ rates to fall back below 6%.