Consumer Prices (QoQ) (2Q) (21:30 EST; 01:30 GMT)
Expected: 1.0%
Previous: 0.1%

Consumer Prices (YoY) (2Q) (21:30 EST; 01:30 GMT)
Expected: 1.9%
Previous: 2.4%

How Will The Markets React?

Australian consumer price growth in the second quarter is expected to have accelerated 1.0 percent from the previous quarter, as drought conditions led food prices higher and lofty oil prices kept energy costs elevated. However, a jump in quarterly inflation may not be enough to push the Reserve Bank of Australia to raise interest rates anytime soon, as central bank Governor Glenn Stevens said last month he has “time” to gauge whether the economy's 16-year expansion and the lowest jobless rate since 1974 will stoke wage increases and price pressures. Furthermore, the annualized inflation rate is anticipated to fall back to 1.9 percent from 2.4 percent – the lowest reading since the fourth quarter of 1999. With the RBA’s stated comfort zone within a yearly range of 2-3 percent, the second quarter data isn’t likely to cause inflation worries. The key to trading this event risk lies in the surprise factor, as a greater-than-expected figure will lead markets to ramp up speculation of possible policy tightening by the RBA. On the other hand, if we see the consumer price report miss estimates, the Australian dollar will likely plummet while bonds and equities could rally in anticipation of steady interest rates through year-end.

Bonds – 10-Year Australian Government Bond Futures

The recent rally in 10-year Australian Government Bond futures was stopped short at Fibonacci resistance at the 93.92 level, as stronger-than-expected producer prices for the second quarter send yields rising 2 basis points to 6.1 percent on Monday. AGBs could continue their descent during tonight’s Asian trading session, as consumer prices for the same period are anticipated to jump 1.0 percent. However, if the consumer price report actually shows that inflation was weaker-than-predicted, AGBs may jump higher to test resistance and target a break of 94.00.

FX – AUD/NZD

AUD/NZD has remained in a steady downtrend, especially as markets speculate on the possibility of a hike by the Reserve Bank of New Zealand to another record of 8.25 percent on Wednesday evening (17:00 EST; 21:00 GMT). However, the release of Australian consumer price data on Tuesday evening (21:30 EST; 01:30 GMT) could shake up the pair a bit, especially if the reading differs from expectations. Should we see a greater-than-predicted report, Australian dollar strength could take AUD/NZD back up to the 1.1000 level. On the flip side, softer inflation readings will only allow the pair to dip further, as the chances of a rate increase by the Reserve Bank of Australia this year will be slashed. Furthermore, the New Zealand dollar is likely to garner a good amount of strength ahead of the expected RBNZ rate hike. Thereafter, though, AUD/NZD could see a bounce, as growth prospects for the Australian economy remain to the upside, while aggressive monetary policy by the RBNZ has created the potential for a sharp slowdown for the New Zealand economy.

Equities – ASX 200 Index

The S&P/ASX 200 Index fell 0.5 percent to 6,390.40 from a record close of 6,421.80 as subprime fears continued to dominate the markets after US banks increased reserves for bad loans. Companies that depend on US demand, such as James Hardie, the biggest seller of home siding in the US, fell 1.6 percent to A$8.71 while Amcor Ltd., the world's largest maker of plastic soda-drink bottles, dropped 0.3 percent to A$7.42. Meanwhile, the financial sector suffered as well with National Australia Bank, the country's biggest lender, down 1.1 percent to A$40.38 as Commonwealth Bank of Australia, the nation's second-largest, fell 0.6 percent to A$56.55.

Australia’s benchmark equity index has backed off from resistance, and additional declines towards 6,200 could be in store if consumer price data for the second quarter is released at hotter-than-expected levels, as traders would look towards another round of policy tightening by the RBA. On the other hand, if CPI for the quarter proves to be tepid and misses estimates, the S&P/ASX may retake the recent highs as speculation of a rate hike before year end would be slashed.

Terri Belkas is a Currency Strategist at FXCM.