Macro Insights: Hot Australia and New Zealand CPI to challenge the peak inflation narrative Macro Insights: Hot Australia and New Zealand CPI to challenge the peak inflation narrative Macro Insights: Hot Australia and New Zealand CPI to challenge the peak inflation narrative

Macro Insights: Hot Australia and New Zealand CPI to challenge the peak inflation narrative

Macro 4 minutes to read
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Charu Chanana

Head of FX Strategy

Summary:  A double dose of upside surprise in inflation was reported this morning. Australia’s 4Q CPI rose to fresh 33-year highs and New Zealand’s remained firm near its recent three-decade highs as well. This brings potential for some upward re-pricing in RBA’s rate hike path, and also raises concerns on whether China’s reopening and the surge in commodity prices, along with a boost to travel demand, could bring another leg up in price pressures later in 2023.

Hot Australia CPI cements RBA’s February rate hike

Inflation reports in Australia and New Zealand were released this morning, and both came in higher-than-expected.

The bigger upside surprise was in Australia’s CPI report which showed inflation rising to a fresh 33-year high in the fourth quarter. 4Q CPI was up 7.8% YoY from 7.3% YoY in 3Q, coming in above the 7.6% YoY expected. December inflation was an even bigger shock, rising by 8.4% YoY from 7.3% YoY in November. Both weighted median and trimmed mean measures of inflation also rose. Price pressures were mostly underpinned by a rise in electricity prices as well as a pickup in holiday travel during the Christmas period.

While some may argue that Australia’s inflation is peaking, given that the headline CPI gain of 7.8% YoY was less than the RBA’s expectation of 8% YoY, it is imperative to look at how close the trimmed mean is getting to the headline CPI. With trimmed mean CPI at 6.9% YoY, less than 100bps below headline, shows that the price pressures are rather broad-based. Today’s inflation print cements another 25bps rate hike by the RBA at the February meeting, while also raising the risk of further tightening if inflation data continues to surprise on the upside.

AUCPIYOY Index Australia CPI Al 20230125 123406
Source: Bloomberg, Saxo Markets

Steady NZ CPI suggests RBNZ could surprise

Earlier in the day New Zealand CPI came in steady at 7.2% YoY for Q4, the same as previously, but above the 7.1% consensus estimate. The quarter-on-quarter read was 1.4% rather than the 1.3% forecast but a deceleration from the prior print of 2.2%. The YoY read was still below the central bank’s forecast of 7.5%, but still remaining close to the 30-year peak of 7.3% YoY printed in June 2022 This suggests that inflation isn’t cooling yet despite rapid rate increases. Price pressures were underpinned by higher house-building costs and higher wages, along with higher demand for holiday travel just like for Australia.

Non-tradable inflation, or domestic price rise rises, were up 6.6% YoY, same as last quarter. Meanwhile, tradable inflation was 8.2% YoY, higher than 8.1% YoY on Q3. While the downside surprise in non-tradable inflation may prompt some calls for the RBNZ to slow down its rapid rate increases, there is also reason to believe that the central bank could continue to deliver hawkish as inflation remains hot. This brings the February RBNZ meeting (decision due 22 Feb) in focus, with market pricing also split between a 50 or a 75bps rate hike.

Also worth noting that the new NZ Prime Minister Chris Hipkins is bringing the focus back on economic growth amid forecasts of a recession in 2023, and the administration is highlighting the fall in quarterly CPI from 2.2% in Q3 to 1.4% this quarter as a peak in inflation.

NZCPIYOY Index Australia CPI Al 20230125 123632
Source: Bloomberg, Saxo Markets

AUDNZD poised for more gains

AUDUSD has been bumped higher recently due to a host of factors, including the faster-than-expected China reopening and the resulting gains in commodities such as iron ore. Meanwhile, reports that China will relax its soft ban on some Australian commodities, including coal, has also underpinned. Today’s CPI data should provide further support for AUD, with AUDUSD making fresh highs above 0.7100. The pair may however remain volatile however with US PCE data on the horizon this week ahead of the FOMC meeting next week. If the USD emerges stronger, resistance at 0.7125 may stick. NZDUSD was a notch weaker, staying below 0.6500 with key hurdle at 0.6535. AUDNZD was up over 1%, jumping past the key 1.0900 to test the cycle highs at 1.0955 and the 0.618 retracement around 1.11. The cross likely has more room on the upside due to the relative scope for upward re-pricing of the RBA path compared to RBNZ.

AUDNZD Curncy AUDNZD XRATE   20230125 122843
Source: Bloomberg, Saxo Markets

Here is the latest technical analysis on AUDUSD and other AUD crosses from our Technical Analyst, Kim Cramer, highlighting the key levels to watch next.

Peak inflation narrative getting a reality check

A double dose of upside inflation surprises will spark concerns on whether the global inflation has really peaked. We have continued to see tight labor markets for now, which should continue to fuel wage pressures globally. China’s reopening is also further raising prices of commodities, especially crude oil and industrial metals. Meanwhile, a big part of Australia and NZ’s CPI gains in Q4 came from a rebound in travel, which is likely to get a further bump higher with China’s reopening and pent-up demand.

In summary, today’s data was a reminder that it is still early to take comfort on inflation, and start thinking about peak rates even as a pause from several central banks looks imminent in Q1. Inflation could come back to haunt global markets in H2, and this would force most central banks, especially the Fed to stay cautious of premature easing.

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