The Australian Dollar (AUD) underperformed and Australian bonds surged on cooler Australia underlying inflation. The policy-relevant trimmed mean CPI rose 0.2pts less than expected by 0.8% q/q (consensus: 1.0%, prior: 1%) to be 3.9% y/y (consensus: 4.0%, prior: 4.0%), BBH FX analysts note.

Softer Australia inflation pushes USD downwards

“Australia headline CPI matched consensus. Headline CPI rose 1% q/q (consensus: 1.0%, prior: 1.0%) driven by Housing and Non-alcoholic beverages. Annually, the CPI inflation quickened to 3.8% from 3.6% in Q1. The monthly CPI indicator was also in line with expectations. In June, headline inflation eased 0.2pts to 3.8% y/y while the trimmed mean inflation slowed 0.3pts to 4.1%.”

“Meanwhile, Australia households continue to curb spending. In volume terms, retail turnover fell more than expected in Q2 by -0.3% q/q (consensus: -0.2%) following a -0.4% q/q decline in Q1. In nominal terms, retail sales growth overshot expectation rising 0.5% m/m in June (consensus: +0.2, prior: +0.6%) as mid-year sales boosted spending on discretionary items.”

“Softer Australia underlying inflation and poor retail sales activity mean RBA rate hikes are off the table. Cash rate futures went from pricing a small probability of an RBA rate hike by year-end to 70% odds of a 25bps rate cut after today’s data. We expect the RBA to stay on hold the rest of this year because inflation remains above the RBA’s 2-3% target.”