Australian inflation back in target range – Commerzbank

Late tonight (or early tomorrow morning, depending on your perspective) Australia will release its Q3 inflation figures. This will be the prelude to next week's meeting of the Reserve Bank of Australia (RBA). And what the markets will see tomorrow is likely to please the central bankers, Commerzbank’s FX analyst Volkmar Baur notes.

Lower inflation can lead to AUD weakness in the short term

“The majority of analysts expect an annual inflation rate of 2.9% in the third quarter. In my view, however, the risk is more to the downside. For the month of September, the rate could even be around 2.3%. While the quarterly rate has probably returned to the target range of 2-3%, the monthly rate is therefore likely to have ended up even below the implicit target of 2.5%.”

“But while all of this is likely to please central bankers, it is unlikely to persuade them to cut rates next week. Although the lower inflation rate meets one of the conditions for a rate cut, the Reserve Bank of Australia still sees the risk to inflation as being on the upside, with the labour market still very strong and wage growth still too high.”

“For the Australian dollar, this means that lower inflation, especially if it surprises to the downside, could lead to weakness in the short term. In this case, the market would certainly consider the possibility of an earlier RBA rate cut. However, the weakness is likely to be short-lived as I do not expect the RBA to cut rates next week.”