Australian Dollar: Hot CPI supports carry and RBA risk – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad reports the Australian Dollar (AUD) is outperforming after hotter-than-expected July Consumer Price Index (CPI) data lifted Reserve Bank of Australia (RBA) rate hike expectations. Futures now almost fully price a 25 bps move to 4.60% by year-end, though Haddad still sees risks skewed toward an extended pause, with restrictive policy and a softening labor market offset by strong carry and commodity exposure.

Australian Dollar boosted by inflation surprise

"AUD is outperforming. Australia July CPI inflation ran hot, lifting rate hike bets. Headline CPI rose 1.0% m/m (consensus: 0.9%) vs. -0.1% in June driven in part by automotive fuel and clothing."

"On an annual basis, headline CPI inflation eased less than expected to 3.5% (consensus: 3.3%) vs. 3.8% in June while the trimmed mean CPI remained at 3.6% (consensus: 3.5%) for a second straight month and tracking above the RBA’s end-December 3.3% forecast."

"RBA cash rate futures now almost fully price a 25bps hike to 4.60% by year-end, up from 60% before the July CPI data."

"We still think the risk is skewed towards a more extended pause in the RBA tightening cycle because policy is already somewhat restrictive and the labor market is softening."

"Regardless, Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)