The RBA is quite happy with a weaker AUD - and despite weaker inflation numbers this week , we doubt that investors will have any solid reasons to chase the currency too much higher after a week that saw the same old story, but ended with a solid bounce. The Australian CPI weakness came despite higher oil prices, the main reason we had expected stronger inflationary pressures, and it seems that, underlying price pressures (wage growth) will pick up anytime soon - and that will keep the RBA hawks in check for a while longer.
We expected a test of the 0.70 level over the last week, and we got it, but that was quickly followed by a raft of US dollar selling into the first day of November. Despite the late rally in the week it doesn’t change our view to the longer term. This is despite a break out to the upside of the equidistant channel, in place since the start of the year. AUDUSD is underpinned by two key downside levels now, one at 0.7040, the other 20 pips lower at 0.7020.
The upside now sees us test retest the trend line break at 0.7190, but this level is fairly loose as we look longer term. The view now sits back with the central bank, especially after inflation undershot the RBA target for the 11 consecutive month. The lower inflation reading means that the RBA hawks will have to sit back for a little longer as expectations for a rate hike have been pushed back to at least June/July of 2019. Data will have to dramatically improve for there to be any change here.
The other aspect we must look forward to is the US dollar angle, which of course means developments on the US-China trade deal. The White House has said that the Xi Jinping and Donald Trump will meet at the G20 summit at the end of November, but denied that any deal documentation or material had been drawn up in preparation. The Greenback will be dominated by whatever comes from the G20, and any rumors or White House noise in the run up.