• AUD/USD bulls are failing to convince as price melts from CPI provoked highs near 200 DMA.
• Inflation risks are being accounted for in the markets with a focus on central banks.

Strong inflation data and growing concerns about the persistence of price pressures intensified this week throughout the commodity bloc. Yesterday, Australian Consumer price Index data came in hotter than expected which suggests that underlying inflation is more widespread than thought.

''While some of these price pressures will likely ease through 2022, others will emerge as wages growth accelerates. This suggests the RBA may have less time on the policy front than it (and we) believed,'' analysts at ANZ bank explained. ''If the RBA’s guidance about the move in the cash rate is brought into 2023, we think it likely the 10bp yield target will be dropped. Next week’s RBA statement just got a lot more interesting,'' the analysts added. 

Meanwhile, the focus was on Wednesday's Bank of Canada meeting. The central bank responded to inflation pressures with a more hawkish message than markets had anticipated, bringing forward the expected timing of economic slack being absorbed. The BoC has clearly opened its doors to a rate hike in April. The other key policy decision—ending QE by moving into the “reinvestment phase” of that program—was as expected.

RBA to be forced into action?

As for the RBA, the swaps market is now pricing in nearly 60 bp of tightening over the next twelve months, up from 50 bp at the start of this week.  ''We believe the bank will push back against these market expectations rather than validate them,'' analysts at Brown Brothers Harriman argued. 

''New macro forecasts will be released then and will be a big part of the forward guidance.  We also think the RBA could push back against recent currency strength, though AUD gains have been capped around 0.7550, just below the 200-day moving average near 0.7560 currently.''

''The RBA might be forced into action after all," wrote Commerzbank analyst Antje Praefcke in a note to clients, referring to rising 3-year yields.

"The market is likely to increasingly assume that the RBA will have to rethink its expansionary monetary policy further due to economic and inflationary developments, which is likely to principally support AUD."