Australian Dollar Broadly Lower as Soft CPI Reverses RBA Hike Bets

The Australian dollar is currently the weakest FX major of the Asian session following slightly softer Q2 CPI figures. I had mentioned my hunch earlier that markets were potentially leaning too heavily into the high-inflation narrative, which could weigh on the Aussie if the numbers failed to justify such expectations. That appears to have been the case, with traders seemingly positioned for something a bit more hawkish than what the Q2 figures ultimately delivered.

 

 

Inflation Removes Imminent Need for RBA to Hike

Yes, trimmed mean remains high at 0.8% q/q, the annual rates slowed to 3.6% and is at least moving in the correct directing. That should allow the RBA to retain its hawkish bias without needing to raise rates in August. It also strengthens the case that the cash rate has already reached its terminal level for this tightening cycle

The widening gap between tradables and non-tradables inflation suggests Australia's inflation problem is now overwhelmingly domestic rather than imported. That should give the RBA confidence that past rate hikes are working, but with non-tradables inflation accelerating to 4.9%, policymakers are unlikely to abandon their hawkish bias any time soon.

The RBA next meet on 11 August, though we’ve likely seen the most important data points for them to make an informed decision. Friday’s producer prices are unlikely to move the needle, though household spending in two weeks will warrant a look.

 

Source: ABS, TradingView

 

Key Takeaways From Australia's Q2 CPI Report

• Headline CPI eased to 3.8% y/y from 4.0%, while trimmed mean inflation slowed to 3.6% y/y, reinforcing the gradual disinflation trend.
• Housing remained the largest contributor to annual inflation, while transport inflation eased sharply following lower fuel prices.
• The Australian dollar weakened across the board after the release, suggesting markets viewed the report as reducing the likelihood of another RBA rate hike this cycle.
• Inflation is becoming increasingly concentrated in domestic, service-based sectors, highlighting that Australia's remaining inflation challenge is largely home-grown rather than imported.
• The data support a hawkish hold from the RBA, with policymakers likely to keep rates restrictive while monitoring whether sticky domestic inflation begins to moderate more convincingly.

 

 

 

 

 

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

The Aussie broke to an 11-day low and reached my July-VPOC target mentioned in yesterday’s video. If the Fed lean into hawkish expectations – whether via Warsh’s press conference of dissenters calling for a hike – the US dollar could gain bullish traction and weigh further on AUD/USD. But with momentum pointing lower for AUD/USD, bears may be seeking to fade into minor rallies in anticipation of a move towards the 200-day EMA, just above the 69c handle.

Further out I still see the potential for AUD/USD breaking above 70c, though its current pullback needs to play out first.

Source: ICE, TradingView

 

 

 

AUD/JPY Technical Analysis: Australian Dollar vs Japanese Yen

The recent rally in AUD/JPY—impressive as it was—failed to retest the June high before momentum reversed lower. What has caught my eye is the break below the trendline on the 4-hour chart. A lower high formed ahead of the break beneath both the trendline and weekly pivot point, adding weight to the bearish case. While prices are attempting to recover some of their post-CPI losses, I suspect bears may look to fade rallies towards the weekly pivot point and the 114.00 handle.

Source: ICE, TradingView

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge