AUD/USD and NZD/USD Fundamental Daily Forecast – Australian CPI Spikes in Q2, but Core Inflation Subdued

The Australian and New Zealand Dollars are trading steady-to-better early Wednesday, hovering just below recent peaks as investors turned to this week’s Federal Reserve meeting for clues on the policy outlook.

Traders are also monitoring the impact of rising cases of the highly contagious COVID-19 Delta variant and the unnerving plunge in Chinese equity markets earlier in the week that caused a ripple effect to global sentiment, creating a risk-off situation.

Meanwhile in Australia, the government reported that Australia’s consumer inflation rose at the fastest annual pace in almost 13 years last quarter.

At 03:49 GMT, the AUD/USD is trading .7361, up 0.0002 or +0.03% and the NZD/USD is at .6958, up 0.0009 or +0.01%.

Australian CPI Blows Hot in Q2, Core Inflation Far Cooler

Australia’s consumer prices rose at the fastest annual pace in almost 13 years last quarter as petrol jumped and government subsidies unwound, but a far tamer reading for core inflation suggested the spike would be fleeting, Reuters reported.

Wednesday’s data from the Australian Bureau of Statistics showed the headline consumer price index (CPI) rose 0.8% in the June quarter, from the previous quarter, just topping market forecasts of a 0.7% increase.

The CPI climbed a sharp 3.8% on a year ago, but largely because the index had been artificially depressed last year by lockdown relief measures notably on child care payments.

The more benign underlying trend was evident in the Reserve Bank of Australia’s (RBA) trimmed mean measure of inflation which rose just 0.5% in the quarter and 1.6% for the year.

Core inflation has run stubbornly short of the RBA’s 2-3% target band for more than five years, and the bank itself fears it will not reach 2% until the middle of 2023 even with interest rates at record lows.

Daily Forecast

Traders showed little reaction to the inflation news because the jump in prices has already been overtaken by events as coronavirus lockdowns in major population centers will almost certainly send the economy backwards this quarter, a powerful argument for extended monetary and fiscal stimulus.

The same goes for the Federal Reserve’s monetary policy decisions. Aussie and Kiwi traders just have too much on their plates to worry about U.S. monetary policy in my opinion.

Restrictions in both countries could weaken consumer spending and employment this quarter, piercing what had been a remarkably rapid economic recovery. Instead, economists are already predicting that Australia will go through a deep contraction in GDP over Q3 21 and that more fiscal and monetary stimulus will be needed once the government lifts its restrictions.