Q4 Inflation Spikes Higher

The Australian Dollar is seeing a flood of demand today on the back of the latest CPI figures, released overnight. Aussie inflation was seen spiking back up to 1.9%, quarter-on-quarter, up from 1.8% prior and above the 1.6% the market was looking for. The year-on-year figure was seen rising back up to 8.4%, a more than 1% jump from the prior 7.3% reading. The Q4 inflation reading marked its highest level since January 1980, driven by increases in transport costs, food prices and new dwelling construction costs.

RBA Concerns

In all, these inflation readings paint a worrying picture for the RBA. On the monthly figure, after flattening out for two months, prices have started to lift again. While there are certain factors recently which might have contributed to a temporary spike in inflation (bad weather, supply issues), the quarterly reading is worrying and suggests that the RBA still has further to go with its tightening program. The bank was among the first to pivot on rates last year and there is some concern now that the bank might have slowed the pace of tightening too early and will now need to play catch up to bring inflation down again.

Holiday Costs See Big Jump

Looking at the breakdown of the data there are some interesting points indeed. Holiday prices, which spike 11% on the prior month in December 2021 were seen spiking 27% in December 2022. Recreation costs were also seen jumping more than 10% on the prior month. These marked the two biggest cost increases. Given that December is a key holiday time in Australia, there is some credence to viewing these increases as transitory cost jumps which will likely flatten out now.

AUD Well Bid Following Data

However, the market reaction is key here. Aussie government bond yields have spiked on the back of the release. AUD too has been higher across the board, reflecting traders’ expectations that the RBA will either push ahead with a larger hike at the February meeting or signal that its tightening program will need to run longer than forecast. In both cases, AUD looks likely to remain well supported moving forward as the market re-prices the Aussie rate-path for the year ahead.

Technical Views

AUDUSD

The recent retest of the .6857 level has seen the Aussie turning higher again with price now having broken through initial 2023 highs to test the .7130 level. With momentum studies firmly bullish here and with the retail market heavily short, AUDUSD has room to move up to .7287 next.