China’s CPI data: Australian Dollar retains gains

• 0.7% YoY was China’s October CPI increase. AUD/USD holds its gains following the release, which fell short of the 0.8% forecast.
• Despite strong expectations of a 25-basis-point rate rise by the US Federal Reserve, the US Dollar weakens.
• Upcoming inflation releases and robust US employment figures could underpin the Greenback.

Around 0.6890 is where AUD/USD trades in Monday’s Asian session. The pair is recovering after two days of declines, supported by a firmer Australian Dollar (AUD) following Consumer Price Index (CPI) figures from China, a close trading partner of Australia.

At 0.7% year on year, China’s October CPI increase slowed from September’s 0.9% and missed the market forecast of 0.8%. On a monthly basis, CPI was unchanged at 0% in October, matching expectations after the previous 0.2% rise. Producer prices exceeded forecasts: China’s Producer Price Index (PPI) advanced 5.7% YoY in October, against a market consensus of 5.3% and September’s 5.0% increase.

A weaker US Dollar (USD) also supports the advance in AUD/USD. The currency’s decline comes despite the CME FedWatch tool showing that the probability of another 25-basis-point rate rise at the December 8-9 Federal Open Market Committee (FOMC) meeting has climbed to nearly 80%.

Stronger US labour market figures could, however, support the Greenback and weigh on the pair. October Nonfarm Payrolls (NFP) increased by 165,000, beating the 65,000 consensus and accelerating from September’s 60,000. The Unemployment Rate edged lower to 4.1%, compared with a 4.2% forecast. For further clues to the Federal Reserve’s next policy decisions, traders will scrutinise Tuesday’s US Consumer Price Index (CPI) release and Friday’s Producer Price Index (PPI) report.

The latest financial market strains have prompted a conventional flight to quality, according to ABN Amro analysts, with investors “seeking safety in US Treasuries and reassessing the need for additional tightening amid financial market stress.” Reconsideration of the Fed’s policy trajectory fits the wider market view that expectations of rate rises are receding. It also strengthens the view that, should Treasury yields keep falling, further risk-off episodes may offer the Dollar limited additional support.