AUD: Softer Inflation to Cool Rate Hike Speculation

Key points:

• Australia's Q2 core inflation cooled, reducing pressure on the RBA to hike rates at its August meeting.
• Strong jobs growth and retail sales, along with recent subsidies, suggest it's premature to expect rate cuts from the RBA despite the softer inflation data.
• AUDUSD remains sensitive to China's economic performance and commodity prices, with key support levels at 0.6465. AUDNZD could be a cleaner play on yield differentials.

Australia’s Q2 inflation cooled from the last quarter, sending a sigh of relief and taking pressure off the Reserve Bank of Australia to hike rates at the August 5-6 meeting.

Headline inflation for June came in at 3.8% YoY as expected, from 4.0% in May. Quarterly inflation print remained unchanged at 1.0% QoQ while the trimmed mean was lower at 0.8% QoQ vs. 1.0% QoQ expected and in the first quarter.

AUDUSD slipped below 0.65 handle, as Australian bond yields dropped. However, one data point does not constitute a trend. The softer inflation may give reasons to the RBA to tone down its hawkishness, it is not enough for the central bank to claim victory over inflation.

Meanwhile, jobs growth and retail sales remain strong, and the RBA has raised rates by less than other G10 central banks. Additionally, recent subsidies to support Australian consumers with floating-rate mortgages may have a delayed impact on inflation, making it premature to expect rate cuts from the RBA.

As such, dip buyers could potentially come in if AUDUSD slips towards its support at 0.6465. Support for AUDNZD comes in at the 100DMA at 1.0925 and this may be a cleaner play on yield differentials. RBNZ’s rate cuts have been priced in, while RBA pricing may have some room to catch up as any potential rate hike is priced out.

AUDUSD is significantly influenced by China’s economic momentum and stimulus announcements, as well as copper and iron ore prices which have been trending lower from their May highs.