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Jane Foley, Senior FX Strategist at Rabobank, suggests that tomorrow will bring the release of Australia’s Q2 CPI inflation report, which should freshen the debate as to when the RBA are likely to pull the trigger on interest rates.  

Key Quotes

“The minutes of the July 3 policy meeting underpinned the view of policy makers that “the next move in the cash rate would more likely be an increase than a decrease”.   However, there is good reason for the RBA to remain cautious in the months ahead.”

“While a stronger than expected data release yesterday would be supportive for the AUD, we continue to see downside risk medium-term towards AUD/USD0.71 on a 9 to 12 mth view.   Consequently we would favour selling AUD/USD on rallies in the event of stronger than expected CPI data.”

“Driven by higher petrol prices, the consensus expectation for tomorrow’s CPI release stands at 2.2% y/y for the headline series. This would put the inflation rate back within the confines of the RBA’s 2% to 3% target band.”

“That said, the RBA puts emphasis on the measure of CPI inflation which excludes volatile items (such as food and energy) and on the weighted and trimmed mean.   All of these measures are expected to come in below the headline rate at around the 1.9% which is consistent with still subdued growth in consumption and low wage increase.”

“There are a few other factors which justify a wait and see outlook from policymakers. Firstly, since Australia did not fall into recession as a consequence of the global financial crisis, RBA was not forced to adopt the same emergency policy stance as many other central banks.   As a consequence, with rates already at 1.5% there is far less pressure for the RBA to normalise.”

“Although the current value of AUD/CNY is well within the confines of the range that has held for the past couple of years, fears that the Chinese authorities could use monetary policy stimulus to offset the impact of trade wars with the US opens the risk of further CNY weakness.   This could have a significant impact on the competitiveness of China’s trading partners and commodities exporters, including Australia, would likely be amongst those most impacted.”

“Assuming that Australian core CPI remains benign in Q2, we expect the RBA to retain a cautious approach to policy.”

“Given the likelihood of a September rate rise from the Fed and our expectations of further broad-based USD gains, we favour further downside in AUD/USD in the coming months.”