Australia In Deflation

The Australian Dollar has retained a bid tone at the European open on Wednesday despite news overnight that Australian CPI fell again in Q2. The data released by the Australian Bureau of Statistics overnight showed that in June, consumer prices fell by their most on record at -1.9%. The ABS also reported that annual inflation in Australia for the 12 months through June 2020 fell by 0.3%, confirming a move into deflationary territory for the only the third time since 1949.

Looking at the breakdown of the Q2 data, the biggest deflationary contributors came from childcare (-95% as a result of government initiatives), petrol (down by 19.3% as a result of oil prices declines) and pre-school costs (down 16.2% as a result of government initiatives).

RBA Expectations

The data has further increased expectations that the RBA will look to ease again in the near future. RBA governor Lowe last week told markets it was possible the bank could cut rates to as low as 0.10% and also noted that it could extend its bond buying program.

The move into deflationary territory over Q2 complicates the picture, however. The RBA will now have to walk a very fine line between attempting to reignite upward price pressures in the economy while risking deepening a deflationary spiral, conditions which the BOJ struggled with for over a decade following the global financial crisis.

Australia Battling Second Wave

The current economic situation is also made more complex by the second wave of coronavirus currently gripping Australia which has led to cities such as Victoria and Melbourne being placed back into lockdown. Last week, Australia recorded its highest ever daily new infections numbers at 483. While infections have fallen a little this week, at 459 over the last 24 hours, the number of new infections is still elevated and the risk of further lockdowns across the country remains high given the strict approach being taken by the Australian government in a bid to protect the capital city from entering lockdown. The government notes that the current wave of the virus is being driven by a surge in workplace infection rates in places such as care homes, distribution centres, slaughterhouses and warehouses.

Technical Views

AUDUSD (Bullish above .7030)

From a technical viewpoint. The AUDUSD has now broken firmly above the long-term bearish trend line and above key resistance at the .7030 level. While above here, the near-term bias remains bullish, supported by the 50dma. Price is currently challenging the .7142 level which, if broken, will open the way for a test of the .7318 level next.

Australia Sees Worst Quarterly Decline in Inflation on Record

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