Impact of CPI on AUD/USD

Australia’s Consumer Price Index (CPI) increased by 3.8% year-over-year in December, beating the market expectation of 3.6%, as reported by the Australian Bureau of Statistics. On a quarterly basis, the CPI rose by 0.6%. The annualized rate stood at 3.6%. The Reserve Bank of Australia’s (RBA) Trimmed Mean CPI reported a 0.2% rise monthly and a yearly increase of 3.3%. December’s monthly CPI was 1.0%, up from 0% the previous month. After this inflation report, the AUD/USD currency pair rose, trading at 0.7010, marking a 0.04% daily increase. The Australian Dollar strengthened against major currencies, particularly the US Dollar, which fell by 1.18%. Before the CPI announcement, analysts expected the RBA to raise interest rates due to rising inflation. A strong labor market, highlighted by the addition of 62,500 jobs in December and an unemployment rate of 4.1%, supports this expectation. The Australian Dollar is also benefiting from high demand for iron ore exports and a positive trade balance, largely influenced by the Chinese economy. The RBA’s interest rate decisions play a crucial role in the strength of the AUD.

Positioning in the Derivatives Market

This morning’s updated inflation data significantly impacts the market, showing December’s annual CPI at 3.8%, higher than the expected 3.6%. This unexpected rise strongly suggests a rate hike from the Reserve Bank of Australia (RBA) in their upcoming meeting. The market’s pricing for a February rate increase has jumped from 63% to over 85%, creating a clear direction for us. We should quickly consider establishing bullish positions on the Australian Dollar in the derivatives market. Buying AUD/USD call options that expire in late February or March presents a direct opportunity to profit from the anticipated currency appreciation following the RBA meeting. Target strike prices around 0.7050 to 0.7100 appear particularly appealing. The CPI surprise has likely led to an increase in one-week implied volatility for AUD/USD, now estimated at about 11%, up from around 8% last week. This rise makes outright option purchases pricier, so we should look at bull call spreads to reduce entry costs. Selling a higher strike call, like 0.7150, while buying the 0.7050 call can help finance our position and limit our risk. Looking back at the aggressive global interest rate hikes in 2022 and 2023, we saw many currencies rally for weeks after their central banks unexpectedly shifted to a more aggressive stance. Australia’s strong labor market, with unemployment at a multi-month low of 4.1% last month, creates a solid foundation for a similar trend. This historical context suggests we should hold these bullish positions longer than just a few days. The fundamentals supporting the Aussie remain strong, enhancing the validity of this trade. Iron ore prices have proven resilient, staying above $130 a tonne throughout January, while recent manufacturing data from China indicates modest growth. These elements bolster Australia’s trade terms and, subsequently, its currency. This trade focuses not only on the strength of the Aussie but also on the ongoing weakness of the US dollar. Uncertainty around US trade policy and the upcoming leadership change at the Federal Reserve are pressuring the greenback. This combined situation makes long AUD/USD positions one of the most attractive trades in the upcoming weeks. Create your live VT Markets account and start trading now.

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