AU manufacturing and CPI power ahead

A good set of data licked the week off for Australia, with manufacturing PMI hitting its second highest level since 1994 and CPI reaching 2.6% YoY according to the monthly read from Melbourne Institute.

Australia’s manufacturing sector expanded for a 7th consecutive month according to the PMI survey by AIGroup. At 59.2 it is the 2nd highest rates of expansion since 1994 and just a touch below the 59.3 peak set in February. Today’s read is also above the 3-month average which is pointing aggressively higher, and the 12-month average continues to trend higher.  All seven sub-indices expanded in April, with new orders remaining steady at 61.5, sales surging to 65.5 and production at 60.7. Overall it is a solid set of data for April and supportive of growth in the months ahead.

Services and construction PMI’s are also released this week which currently sit at 51.7 and 51.2 respectively. The combined read of all three for March is at 53.5 and, depending on how services and construction perform this week we could expect a higher composite taking today’s strong manufacturing read into account.

Further good news for inflation arrived with Melbourne Institute’s monthly CPI print. At 2.6% YoY, it is the fastest rate since July 2014 and suggests inflationary forces may exceed RBA’s own expectations. He trimmed mean (RBA’s preferred gauge) is now at 1.9%, just a touch below their 2%-3% range although traders were a little disappointed at the soft broad CPI read. Still, with monthly CPI clearly picking up, we think quarterly CPI could continue to move higher and possibly at a greater rate than the ‘gradual pace’ RBA have penned in.

We think the ASX is building up momentum for a bullish break. The recent H4 candle has tried to break the sloping resistance yet closed just beneath it. The resistance level has been generated using closing prices, so the break would be confirmed with a close above it. The moving averages remain in the correct bullish sequence although the momentum of the 8 has slowed somewhat. The 200 and 50 eMA point higher to show bullish momentum from higher timeframes and we also note the potential for the monthly pivot and the 38.2% retracement level to help provide support upon any sell-off.

Throughout March it was information, healthcare, industrials, utilities and finance which lead the broader market higher, with telecoms and consumer staples being the only two sector to move lower.

AUDNZD continues to trade higher having completed the correction above the 200 eMA. We remain confident it could trade as high as 1.12-1.13 in the coming months. NZ’s TWI remains higher the RBNZ would like and we see potential for this to weaken over the coming months whilst RBNZ retain their easing bias and potential to cut this year. If RBA hold at 1.5% (likely) and RBNZ reduce by 25bps this would remained the positive carry for NZ and likely send AUDNZD much higher. By historical terms we still think AUDNZD trades relatively low for a 25bps spread, so we could even see it break above 1.13 if RBNZ do indeed cut. For now AUDNZD will remain in our bullish buy-the-dip watch list.

Matt Simpson | Senior Market Analyst

A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.

AU manufacturing and CPI power ahead

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