AUD: Hot inflation reaffirms rate cuts remain some way off AUD: Hot inflation reaffirms rate cuts remain some way off AUD: Hot inflation reaffirms rate cuts remain some way off

AUD: Hot inflation reaffirms rate cuts remain some way off

Forex 3 minutes to read
Charu Chanana

Head of FX Strategy

Key points:

  • Australia’s April inflation came in hot.
  • The RBA is likely to delay rate cuts and maintain a tightening bias.
  • However, rate hikes are unlikely to be back on the table.
  • Quarterly inflation print due on July 31 is more important.
  • AUD likely to be supported by higher commodity prices and property sector measures from China.

 

Australia’s inflation came in higher-than-expected for April.

  • Headline: 3.6% YoY (vs. 3.5% prior and 3.4% expected)
  • Core: 4.1% YoY (unchanged)
  • Trimmed mean: 4.1% YoY (vs. 4.0% prior)

This has once again raised concerns about the final stretch of inflation moving back to target—something we have often heard for many major economies, including the US. Meanwhile, fiscal spending, supply chain rejigging, green transformation, and trade re-mapping continue to suggest higher structural inflation.

With inflation showing upside pressures and moving away from the RBA’s target band of 2-3%, this further affirms that the RBA will have to delay rate cuts. However, the April inflation print is unlikely to bring rate hikes back to the table because:

  • The monthly CPI in Australia is not the official measure tracked by the RBA. The central bank, instead, focuses on the quarterly inflation measure, which is only due on July 31.
  • Australia’s labor market is softening, with the April unemployment rate rising to 4.1% as migration normalizes, dampening growth in labor supply. However, this is not fast enough to keep pace with the slowing labor demand.
  • Australian consumers are struggling due to high interest rates and inflation. Retail sales in April came in below expectations, and the annual pace of 4.3% growth was significantly below the 4-5% growth seen in 2023.

 

Still, the RBA is likely to maintain a tightening bias given the Fed’s posturing and still-high inflation. As we have argued before, the RBA may well be one of the last G10 central banks to cut rates. This can continue to support the AUD, and the focus may shift away from yield differentials to:

  • Higher commodity prices, which have enabled a considerable rebound in Australia’s terms of trade. Australia is one of the largest exporters of copper, which is seeing increased demand due to green transformation and AI development.
  • China ramping up stimulus measures and taking steps to address the headwinds in the property sector. Recent measures included easing property sector rules in Shanghai, which can continue to support demand for industrial metals from Australia. More measures from China can be expected ahead of the Third Plenum to be held in July.

There are, however, a few risks to consider:

  • Increasing trade tensions between the US and China can adversely affect the AUD.
  • A faster-than-expected slowdown in the Australian economy.
  • Any sharp devaluation of the Chinese yuan, as China aims to support its export engine, could filter down to the AUD.
Source: Bloomberg

Recent FX articles and podcasts:

Recent Macro articles and podcasts:

Weekly FX Chartbooks:

FX 101 Series:

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.