Australian Dollar remains higher after China’s CPI release

• China’s October CPI rose 0.7% YoY against expectations of 0.8%, with AUD/USD retaining its gains.
• Despite strong market expectations of a 25-basis-point rate rise by the US Federal Reserve, the US Dollar weakens.
• The Greenback may find support from robust US jobs figures and forthcoming inflation releases.

Following the release of Consumer Price Index (CPI) figures from China, Australia’s close trading partner, the Australian Dollar (AUD) holds firmer. AUD/USD is recovering from two consecutive days of losses, changing hands near 0.6890 in Monday’s Asian session.

At 0.7% year on year in October, China’s CPI increase slowed from September’s 0.9% and fell short of the 0.8% market consensus. On a monthly basis, CPI inflation was 0% in October, matching expectations after a previous rise of 0.2%. By contrast, China’s Producer Price Index (PPI) recorded a 5.7% YoY increase in October, up from 5.0% in September and above the market forecast of 5.3%.

A weaker US Dollar (USD) is also supporting AUD/USD. The decline comes despite the CME FedWatch tool showing that the probability of a further 25-basis-point rate rise at the Federal Open Market Committee (FOMC) meeting on 8-9 December has climbed to nearly 80%.

However, stronger US employment figures could support the Greenback, potentially weighing on the pair. October’s Nonfarm Payrolls (NFP) increase of 165,000 exceeded the 65,000 market consensus and September’s 60,000 gain. The Unemployment Rate also edged lower to 4.1%, compared with a forecast of 4.2%. For further indications of the Federal Reserve’s forthcoming policy decisions, traders will scrutinise Tuesday’s US Consumer Price Index (CPI) release and Friday’s Producer Price Index (PPI) report.

ABN Amro analysts attribute a conventional flight to quality to the latest spell of financial market stress, with investors “seeking safety in US Treasuries and reassessing the need for additional tightening amid financial market stress.” The resulting rethink of the Fed’s policy trajectory is consistent with the wider market narrative of diminishing rate-rise expectations. It also strengthens the view that, should Treasury yields keep falling, the Dollar may find it difficult to gain further support during periods of risk aversion.