Australian Dollar: Mixed CPI backs extended RBA pause – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes AUD/USD slid toward 0.7136 and is expected to settle closer to 0.7000, consistent with Australia–US 2‑year yield spreads. Mixed April Consumer Price Index (CPI), with softer headline but firm trimmed mean, saw Reserve Bank of Australia (RBA) hike pricing pared back and leaves risks skewed toward a longer pause in the tightening cycle.

Yield spreads point to lower Aussie

"AUD/USD dropped to intra-day lows near 0.7136. We expect AUD/USD to stabilize lower around 0.7000, the level implied by Australia-US 2-year bond yield spreads."

"Australia April inflation was mixed. Headline CPI dipped more than expected to 4.2% y/y (consensus 4.4%, March: 4.6%) while the trimmed mean CPI matched consensus at 3.4% vs. 3.3% in March."

"The monthly CPI is Australia’s primary measure of inflation, but the RBA continues to focus on measures of underlying inflation from the quarterly CPI. Australia Q2 CPI data is due end-July."

"RBA cash rate futures trimmed bets of a 25bps hike by year end. In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle."

"First, the RBA projects real GDP growth to be below potential over the next two years. Second, the RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate."

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