AUD Rebounds Despite Lower Inflation: Outlook and Implications

AUD: Lower inflation doesn't hurts Aussie dollar

The Aussie dollar dropped temporarily to 0.6450 before rapidly rebounding after monthly inflation figures surprised on the downside overnight. CPI inflation for the month of July came in at 4.9%, a decline from 5.4% and below the consensus of 5.2%.

As discussed by our colleagues here, this means our call for one last RBA hike in the fourth quarter now hangs by a thread, given how much weight policymakers have been putting on the monthly inflation figures of late. We are still not convinced the path for disinflation will be a smooth one, though, since base effects have been doing a lot of the heavy lifting in bringing inflation lower in the past months. At this point, labour market data become more relevant. Should we see another soft read, the chances of one last rate hike by the RBA would become extremely slim.

From an FX perspective, we are not surprised to see the AUD trading higher despite the softer inflation figures. We have been highlighting how AUD/USD was embedding a good deal of negatives related to Australia’s exposure to China, and market expectations for RBA tightening were very limited even before today’s CPI release. We like the chances of an AUD/USD rebound from these levels.