AUD/USD Shorts Bear the Brunt of Hot CPI, Renewed RBA Hike Bets

Australian inflation came in hot enough to revive RBA hike expectations, with trimmed mean CPI rising 0.5% m/m and annual underlying inflation holding at 3.6%. Australian bond yields jumped after the release, while renewed policy tightening risk added further pressure to elevated AUD/USD short positions.

 

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Hot Australian CPI Revives RBA Hike Bets and Pressures AUD/USD Shorts

Australian inflation delivered a timely reminder of how quickly the monetary policy outlook can change, with July CPI coming in hot enough to revive the prospect of another RBA rate hike.

Money markets had largely written off the chances of a September hike heading into today's report. But that assumption now deserves another look, particularly after minutes from the RBA's August meeting revealed that the Board actively considered raising the cash rate by 25 basis points before ultimately deciding to hold.

Source: ABS

 

• Headline CPI rose 1.0% m/m in July, or 0.6% seasonally adjusted, while annual inflation eased to 3.5% from 3.8%.
• Trimmed mean CPI rose 0.5% m/m, its strongest increase since May, with the annual rate steady at 3.6%.
• Annual inflation was led by housing (+5.0%), food (+3.2%) and recreation and culture (+2.6%).
• Monthly gains were broad, led by transport and clothing/footwear (+2.6%) and furnishings and household services (+2.0%).
• The softer annual headline masks a hotter monthly and underlying inflation pulse.

 

 

 

Australian Inflation Remains Uncomfortably High

Headline CPI rose 1.0% in July, while annual inflation eased to 3.5% from 3.8%. Yet the fall in the annual rate masks considerably stronger inflation momentum underneath the surface. Trimmed mean inflation rose 0.5% over the month, its strongest monthly increase since May, while the annual rate remained unchanged at 3.6% and therefore well above the RBA's 2–3% target range.

The breadth of July's monthly increases was also notable. Goods prices rose 1.3%, services increased 0.7%, non-tradables rose 0.8% and tradables jumped 1.5%. Market services excluding volatile items increased 0.9%, while market goods excluding volatile components rose 1.1%.

And that makes this harder to dismiss as simply another volatile headline CPI print.

Source: ABS

 

 

September RBA Hike Returns to the Conversation

The timing of today's report carries extra weight, given yesterday’s minutes revealed that some members genuinely considered voting to raise the cash rate in August. The Board ultimately held rates steady, partly to allow more time to assess whether the tightening already delivered was sufficient. Yet today’s CPI figures highlight the very upside risks they were concerned about, as a 0.5% increase in trimmed mean CPI hardly provides reassurance that those pressures are disappearing.

The RBA noted that inflation remained too high, the economy was still operating with excess demand and risks surrounding its inflation forecasts were tilted to the upside. It also expects trimmed mean inflation to remain above 3% until mid-2027. While a single report does not guarantee another hike, this was arguably the most important release of the bunch. And these figures likely increase the odds of a live meeting in September compared with 24 hours ago.

 

 

 

AUD/USD Shorts Face Fresh Pressure After Hot CPI

Now is probably a good time to remember that short bets against the Australian dollar continued to rise among futures traders, despite AUD/USD climbing for eight consecutive weeks. Today’s inflation figures could force at least some of those bears out of their positions and provide further support for an already strong Australian dollar.

Source: CME, CFTC (COT), LSEG

 

 

Australian Dollar and ASX 200 React to Hot CPI

The Australian dollar is considering a break above the August 21 high, with the 1-hour chart showing strong momentum after the CPI release. There may be some hesitation with US PCE inflation still to come and Kevin Warsh’s Jackson Hole speech looming. But given elevated short exposure in AUD/USD futures and renewed RBA hike risk, a retest and potential break above 72c remains a possibility.

The ASX 200 is now flat for the day and on track for a dragonfly doji after meeting resistance around 9,200.

 

Australian Bond Yields Jump as RBA Hike Risk Returns

Bond markets also delivered a clear hawkish response. Australian 2-year yields jumped sharply after the release, with the front end rising faster than the long end as traders priced in a higher probability of further RBA tightening. The AU 2s10s curve subsequently became less inverted, while the AU-US 2-year yield spread widened to around 43 basis points.

That relative yield move is particularly important for AUD/USD, as it suggests the repricing is being driven by Australian rate expectations rather than simply a broad rise in global yields. Combined with the renewed possibility of a September hike, it adds another fundamental tailwind for the Australian dollar.

Source: ICE, TradingView

 

 

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge