"The inflation number and the subsequent move in the Aussie show the risk of everyone thinking alike and positioned the same way. You could see not just an inflation surprise but also surprising growth numbers from Australia as global growth gains traction. The bearish Aussie sentiment has gone too far."
- Nader Naeimi, the Sydney-based head of dynamic asset allocation at AMP Capital Investors
It seems that 2014 year will be a difficult one for Australian policymakers, who seek to revive growth in the resource-rich economy that is stuck in the transition phase. On Wednesday a report showed that consumer prices advanced 2.7% over the October-December period moving much closer to the top end of the RBA 2-3% inflation range. The RBA cut its key refinancing rate by 2.25% since late 2011, traders pared their bets Glenn Stevens and his team will make another adjustment during the next policy meeting. While some can believe a rise in inflation is only temporal, a report from Melbourne Institute suggests inflationary pressure will remain high this year.
A gauge of inflation expectations, which is designed to predict consumers' outlook for the next 12 month, climbed to 2.3% last month, following a 2.1% projection a month earlier. The indicator has not been at such a high level since July last year.
Following a surprise rise in inflation and inflation outlook, bulls on the Aussie, the worst-performing major currency in 2013, are now expecting a rally, slashing bets on another rate cut from the RBA. In case traders start closing short positions on AUD/USD it can push the pair up to 90 cents in the coming weeks.
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