Aussie inflation | Australian terms of trade and the end of the mining boom

We came back from the Easter break yesterday to find that the Forex market seemed to have come around to the opinion that Australian inflation was heading upwards with a strength that would oblige the Reserve Bank of Australia (RBA) to raise interest rates in the short term. It was hard to see where this idea had come from – it certainly did not emanate with the RBA itself, which has been sanguine about threats to price stability Down Under.

So pervasive was the expectation of an increase in the CPI figure, due to be released at 1:30 AM this morning in GMT terms, that our Mandelbrot routine exited from our short position in AUDUSD yesterday when the rate here reached a level that was a threat to profits. Then the authorities in Oz released the inflation figures. They were way below the annualised 3.2% rate that had been touted throughout the day yesterday, coming in at 2.9% year-on-year. The AUDUSD smartly reversed and went in the direction we had been expecting prior to our exit. Fortunately, we were still able to capitalise on the news as we also had a long position in GBPAUD (see chart above), which is now performing nicely. Such is the power of diversification.

Australian terms of trade and the end of the mining boom

The sustained rise in the Aussie dollar since the end of January of this year, which has been flagged as an issue by the Australian authorities (see yesterday’s commentary) has been due to a number of factors. One amounts to a somewhat circular argument – that the reduction in the value of the currency over the last quarter of 2013 has led to an increase in Australian exports and therefore an improvement in the terms of trade, which is closely watched. Well, it would, wouldn’t it?

Another has it that the transition from a mining based economy to one that relies on consumption is proceeding faster and better than expected. The rise in property prices in Sydney and Melbourne, which many see instead as a bubble waiting to burst, is pointed to as evidence of this.

In the meantime the part of the economy that has been built on mining is still in decline. Recent evidence of stockpiling in China and new regulations that free up Iron Ore mining in India have resulted in a sharp fall in the price of that commodity. The Chinese economy itself continues to contract and, once more, there is domestic political pressure on for a fall in the Aussie dollar.

The OmiCronFX Mandelbrot routine is watching for a suitable opportunity to re-enter AUDUSD on the short side.