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Australian CPI at 17-Year Lows Further Opens Door for RBA Cuts

Australian CPI at 17-Year Lows Further Opens Door for RBA Cuts

Fundamental Forecast for the Australian Dollar: Bearish

Last week we discussed the move-lower in the Australian Dollar after RBA minutes were released from the meeting in earlier July; showing that the bank may be more amenable to cutting rates should data continue to flag signs of weakness in the Australian economy. And after a surprise rate cut in May, traders needed to remain on guard against any additional moves from the Reserve Bank of Australia as data had been on a downward trajectory of recent.

This week brought the delivery of second quarter inflation data for Australia; and after last quarter’s 1.3% annualized inflation print, considerable attention was focused on this week’s inflation release in order to gauge likelihood of a cut at next week’s meeting. The read of 1.3% printed last quarter was the lowest level since Q1 of 2015 and lower than any of the Australian inflation prints during the Global Financial Collapse: This is the pressure point for Australian rate-setters at the moment, and this will likely be a key determinant as to whether or not the bank actually makes a move at their next rate decision on Tuesday, August 2nd (Monday night in the United States).

This past Tuesday’s inflation data was rather messy: The quarterly headline print came-in at .6% versus forecasts of .4%, so this was good. But the annualized inflation print disappointed, showing at a 1.0% level versus an expectation of 1.1%. This is a 17-year low for the Australian economy and we haven’t seen inflation running this weakly in Australia since the turn of the new century, traversing both the technology bust and the housing collapse. Nonetheless, there were some signs of strength within this inflation report, as ‘core inflation,’ rose by .45% for the quarter to bring the year-over-year core inflation rate to a 1.5% versus market expectations of a 1.4% read. These signals of strength narrowed rate cut bets as expectations for a cut moved down to around 50% on the heels of the CPI release.

Given that the RBA’s target range for inflation is at 2-3%, the bank has the latitude to cut next week; and could certainly do so under given circumstances without eliciting accusations of ‘currency wars’ or embarking upon ‘beggar thy neighbor’ currency weakness strategies. And even if the bank does not cut, they will likely give dovish commentary to markets, further warning their ability and likeliness to cut should inflation continue printing below their target range. The strongest case to be made against a cut next week is the fact that the bank had recently posed a cut to rates in May, and near-term economic data likely hasn’t reflected much of this move as of yet. But whether the bank cuts or not, we’re likely looking at a continued dovish posture from the RBA as cuts either in August or later in the year become the focus of attention for the Australian economy.

For the next week, the forecast on the Australian Dollar will remain at bearish.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.