AUD/USD rallies 30 pips on CPI within technical downtrend; bears fading on rallies due to fundamentals

• AUD/USD rallies three-tenths of a cent on CPI 0.5% q/q beating 0.4% expected and prior q/q.
• CPI at 1.8 % y/y  was also a beat of 1.7% y/y expected, but lower than prior 1.9%.
• However, trimmed mean was inline with prior and expected at 0.4% q/q 1.8% y/y. 
• It was a ho-hum number, well below RBA's target range still and instead, eyes look to the Fed, US key data and moreover, Sino/US high-level trade talks in Washington tonight. 

AUD/USD is bid on the data but it the outcome is not going to move the needle in the early Feb RBA meeting, nor is it likely to change their outlook for the medium term until there is a more promising backdrop in the global commodities markets and Chinese economy. To the contrary, considering NAB's recent announcement that it is going to raise its standard variable rate for owner-occupiers repaying principal and interest by 0.12 percentage points to 5.36 percent this Thursday, just months after Commonwealth Bank, Westpac, and ANZ imposed out-of-cycle hikes, the bar could be lowered slightly for  for an RBA cut which would weigh on AUD/USD - (markets are already pricing about -18 basis points by end-2019). However, for now, the Aussie is bid as the general consensus was for a lower outcome, especially considering that Q3 is seasonally a higher inflationary quarter. 

However, it sis worth noting that the RBA has shown great patience with inflation running below the 2-3% target. Analysts at Westpac reminded us that the RBA is leaning on "the fall in the unemployment rate and the nascent recovery in wages growth," - Westpac. Casting minds back to the latest jobs numbers, they once again underpinned the market's strength. The seasonally adjusted data showed that the employment change arrived at 21.6k vs the expected 18.0k, but a far cry from the prior 39.0k that had been revised higher from 37.0k. The unemployment rate dropped to 5.0%, which is very positive, below the 5.1% prior ad 5.1% expected. Full-time employment has gained traction, -3.0K vs prior was -7.3K, revised from -6.4K and part-time employment change is also looking promising, 24.6K vs prior +46.3K, revised from +43.4K. And above all, the participation rate is sold at 65.6%, marginally lower than prior and expected at 65.7%). 

Meanwhile, yesterday's NAB's business conditions were a shocker. they arrived at 2 vs the prior 11. However, the long term average is slightly lower at 6, but still some way off from the result in a negative outcome. The RBA should be strongly concerned about that data due to its correlation with business activity. 

Looking ahead:

Considering how closely correlated the currency is to risk appetite, this week's Sino/US trade talks, Fed, US data coupled with ongoing sagas throughout Europe, (Italy, softening in Germany, domestic challenges for Macron in France, Brexit in UK to a cliff's edge) and general global economic uncertainties, markets are going to be nervous over where all of this is heading.

AUD/JPY will likely be a thorn in the bull's side as well. There could be some relief in commodities should the dollar fade away over the horizon on dovish Fed sentiment, but China's growth is real and will continue to weigh on the Aussie. 

AUD/USD levels

• Support levels:  0.7125 0.7085 0.7030
• Resistance levels: 0.7175 0.7200 0.7235

Valeria Bednarik, Chief Analyst at FXStreet, explained that the pair had lost the positive momentum seen early January when it reached 0.7235, but the bounce from near the 38.2% retracement of the mentioned rally last week, limits the downward potential:

"The 4 hours chart shows that the pair is hovering around directionless and converging moving averages which clearly reflect the lack of directional strength. The Momentum indicator in the mentioned chart heads south around its mid-line, while the RSI hovers around 50, also failing to provide directional clues. The inflation report may fall short of affecting RBA's upcoming decision, but will probably provide some short-term action, with a  break below the mentioned 0.7125 support on bad news opening doors for a steeper slide down to 0.7030."