AUD firms after Q2 CPI was stronger than expected
The Australian dollar (AUD) rose by 50 pips to 0.7565 after Australia’s inflation in the second quarter was stronger than expected. The RBA’s preferred measure of inflation held steady at 1.7%yoy versus market expectations of 1.5%. The main contributor to the rise is medical and hospital services. Non-tradable inflation rose 1.6% yoy, the third consecutive quarter of decline which is the lowest level since the second quarter of 1999. Tradable inflation recorded no movement at 0% over the last twelve months.
FX-Flash-Q2-CPI-not-a-game-changer-27-July-2016.pdf (72 KB)
Further RBA easing in August still likely
We maintain our view that the Reserve Bank of Australia (RBA) is likely to cut the Official Cash Rate by 25bp to 1.5% at the next monetary policy meeting on 2 August. Despite the recent decline in the AUD, it remains 2% stronger against currencies of Australia’s main trading partners since the RBA’s last monetary policy meeting on 7 June. The strength in the AUD TWI, if sustained, is likely to push tradable inflation lower and weigh on service exports, which is highly sensitive to movements in the exchange rate. Slower house price gains and subdued wage growth are also likely to weigh on non-tradable inflation. As financial markets are pricing in only about 50% probability (down from 60% before the CPI numbers) that the RBA will ease next month, a weaker AUD is likely as speculative long AUD positions are liquidated. The AUD has failed to close above 0.7650 since late June. We favour fading any recovery in the AUD for downside target of around 0.72 in the coming months.