AUD: Short-term Gains, Long-term Risks
Charu Chanana
Stratégiste des Marchés
Key points:
- Australia’s July Inflation: Despite a higher-than-expected headline print, Australia’s July CPI data shows slowing inflation with core measures declining, indicating a disinflation trend.
- AUD Could See More Short-Term Strength: The Reserve Bank of Australia is unlikely to pivot at the September meeting, which could add another layer of strength for the AUD in the short-term along with cyclical USD weakness and stable global growth dynamics.
- Potential Risks: Slowing global growth, sluggish Chinese economic performance, Mideast tensions, and potential carry trade volatility could disrupt the AUD rally in the more medium-to-long term.
------------------------------------------------------------------------------------------------------
July CPI Emphasized Disinflation
The latest Australian Consumer Price Index (CPI) data shows a headline reading of 3.5%, slightly above the expected 3.4%. While some interpret this as a hawkish print that might support the Reserve Bank of Australia (RBA) in delaying rate cuts until next year, it's important to note that headline inflation has actually slowed from 3.8% in June. Core inflation measures provide a clearer picture of disinflation:
- Trimmed Mean CPI declined to 3.8% YoY from 4.1% in June.
- CPI Excluding Volatile Items and Travel decreased to 3.7% YoY in July from 4.0%
Moreover, the RBA tends to focus more on quarterly CPI prints for monetary policy decisions rather than monthly data, with the next significant reading not due until October 30.
What Can Propel More AUD Gains
- USD Weakness: A broadly weaker USD, influenced by potential dovish moves from the Fed, could provide additional tailwinds for the AUD.
- RBA September Pivot Unlikely: With limited data points ahead of the RBA’s September 24 meeting, it is unlikely that the RBA’s hawkish stance will shift significantly.
- Chinese Stimulus: Expected Chinese economic stimulus could push iron ore prices higher, which would benefit the AUD.
What Can Disrupt the Rally
- Slowing Global Growth: A global economic slowdown could negatively impact demand for Australian exports, putting pressure on the AUD.
- China Sluggishness: Continued economic challenges in China or slow, insufficient stimulus could weigh on Australia’s economic outlook and the AUD.
- Carry Unwinding: If the broader unwinding of carry trades leads to increased volatility or shifts in market sentiment, it could disrupt the AUD rally and create downward pressure on the currency.
- Mideast Tension: Ongoing geopolitical instability in the Middle East could lead to global market volatility, affecting commodity prices and investor sentiment.
In summary, while the AUD has gained traction following the CPI data, its future performance will be influenced by a mix of domestic and external factors. Hawkish RBA comments and Chinese stimulus could provide further support in the short-term. However, expecting the RBA to delay rate cuts to next year if the Fed cuts 2-4 times this year may be a bit stretched.
--------------------------------------------------------------------------------------------------------------
Disclaimer:
Forex, or FX, involves trading one currency such as the US dollar or Euro for another at an agreed exchange rate. While the forex market is the world’s largest market with round-the-clock trading, it is highly speculative, and you should understand the risks involved.
FX are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading FX with this provider. You should consider whether you understand how FX work and whether you can afford to take the high risk of losing your money.
Recent FX articles and podcasts:
- 28 Aug: CAD: Rally at Odds with Fundamentals
- 21 Aug: US Dollar: Excessive Weakness or More to Come?
- 16 Aug: FX Markets Face a Tug-of-War: A Scenario Analysis
- 14 Aug: NZD: Rate Cut Cycle Has Kicked Off
- 7 Aug: JPY: BOJ’s Back to Being Dovish – Can it Cool the Yen Short Squeeze?
- 6 Aug: AUD: Hard to Buy in RBA’s Hawkishness
- 1 Aug: GBP: Bank of England Cut Won’t Damage Pound’s Resilience
- 31 Jul: JPY: BOJ’s Hawkish Policy Moves Leave Yen at Fed’s Mercy
- 31 Jul: AUD: Softer Inflation to Cool Rate Hike Speculation
- 26 Jul: US PCE Preview: Key to Fed’s Rate Cuts
- 25 Jul: Carry Unwinding in Japanese Yen: The Current Dynamics and Global Implications
- 23 Jul: Bank of Canada Preview: More Cuts on the Horizon
- 16 Jul: JPY: Trump Trade Could Bring More Weakness
- 11 Jul: AUD and GBP: Potential winners of cyclical US dollar weakness
- 3 Jul: Yuan vs. Yen vs. Franc: Shifting Carry Trade Strategies
- 2 Jul: Quarterly Outlook: Risk-on currencies to surge against havens
Recent Macro articles and podcasts:
- 15 Aug: Warren Buffett’s Portfolio Shifts: New Bets, Big Buys, and Surprising Exits
- 15 Aug: US CPI: Fed Rate Cut Remains in Play, but 25 vs. 50bps Debate Unsettled
- 13 Aug: US inflation preview: Is it still too sticky?
- 8 Aug: US Economy: Soft Landing Hopes vs. Hard Landing Fears
- 2 Aug: Singapore REITs: Playing on Potential Fed Rate Cuts
- 30 Jul: Bank of Japan Preview: Exaggerated Expectations, and Potential Impact on Yen, Equities and Bonds
- 29 Jul: Potential Market Reactions to the Upcoming FOMC Meeting
- 25 Jul: Equity Market Correction: How to Position for Turbulence?
- 24 Jul: Powell Put at Play: Rotation, Yen and Treasuries
- 22 Jul: Biden Out, Harris In: Markets Reassess US Presidential Race and the Trump Trade
- 8 Jul: Macro Podcast: What a French election upset means for the Euro
- 4 Jul: Special Podcast: Quarterly Outlook - Sandcastle economics
- 1 Jul: Macro Podcast: Politics are taking over macro
Weekly FX Chartbooks:
- 26 Aug: Weekly FX Chartbook: Powell Keeps the Door for 50bps Rate Cut Open
- 19 Aug: Weekly FX Chartbook: Over to Policymakers – Fed’s Powell, Kamala Harris, and BOJ’s Ueda in Focus
- 12 Aug: Weekly FX Chartbook: Case for Outsized Fed Cut Bets to be Tested
- 5 Aug: Weekly FX Chartbook: Dramatic Shift in Market Narrative
- 29 Jul: Weekly FX Chartbook: Mega Week Ahead - Fed, BOJ, Bank of England, Australia and Eurozone CPI, Big Tech Earnings
- 22 Jul: Weekly FX Chartbook: Election Volatility and Tech Earnings Take Centre Stage
- 15 Jul: Weekly FX Chartbook: September Rate Cuts and the Rising Trump Trade
- 8 Jul: Weekly FX Chartbook: Focus Shifting Back to Rate Cuts
- 1 Jul: Weekly FX Chartbook: Politics Still the Key Theme in Markets