Australian Dollar: Extended RBA pause may weigh on AUD – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad sees above-target Australian inflation keeping Reserve Bank of Australia (RBA) hike risks alive, with June and Q2 Consumer Price Index (CPI) expected to show firm trimmed mean readings. However, Haddad judges risks skewed toward an extended pause given sub-potential growth and a cash rate near the top of neutral estimates, viewing this as a headwind for the Australian Dollar (AUD).

Inflation data and RBA guidance

"Headline CPI is expected at 4.0% y/y for a second straight month while trimmed mean CPI is expected at 3.7% y/y vs. 3.6% in May."

"The monthly CPI is Australia’s primary measure of inflation, but the RBA continues to focus on measures of underlying inflation from the quarterly CPI. Trimmed mean CPI is seen rising to a two-year high at 3.7% y/y in Q2 vs. 3.5% in Q1, keeping RBA rate hike bets live."

"Speeches by RBA Governor Michele Bullock (Tuesday) and Assistant Governor Sarah Hunter (Thursday) may provide some policy guidance ahead of the next RBA decision on August 11."

"RBA cash rate futures price-in 30% odds of a 25bps hike in August and fully price one to 4.60% by year end."

"In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle which is a headwind for AUD: (i) RBA projects real GDP growth to be below potential over the next two years; (ii) RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate."