Australian Dollar remains higher after China’s CPI release

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

AUD/USD recovers from two consecutive days of declines to trade near 0.6890 in Monday’s Asian session. Supporting the pair is a firmer Australian Dollar (AUD), which remains stronger after the Consumer Price Index (CPI) release from China, a close trading partner of Australia.

At 0.7% year-on-year in October, China’s CPI increase slowed from September’s 0.9% and fell short of the market forecast of 0.8%. On a monthly basis, CPI inflation stood at 0% MoM in October, matching expectations after a 0.2% rise previously. Producer prices, however, exceeded forecasts: China’s Producer Price Index (PPI) advanced 5.7% YoY in October, compared with September’s 5.0% increase and the market estimate of 5.3%.

A weaker US Dollar (USD) is also helping AUD/USD move higher. This comes despite the CME FedWatch tool showing that the probability of another 25-basis-point rate increase at the December 8-9 Federal Open Market Committee (FOMC) meeting has climbed to nearly 80%.

The pair could nevertheless face pressure if stronger US employment figures lend support to the Greenback. October’s Nonfarm Payrolls (NFP) increased by 165,000, well above the consensus estimate of 65,000 and September’s reading of 60,000. Meanwhile, the Unemployment Rate edged lower to 4.1%, compared with expectations of 4.2%. For further clues to the Federal Reserve’s next policy decisions, traders will closely track the US Consumer Price Index (CPI) release on Tuesday and the Producer Price Index (PPI) report on Friday.

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