The Australian Dollar (AUD) has been the sole G10 currency to appreciate this week, even as the US Dollar has broadly strengthened. This unexpected performance is attributed to hotter-than-anticipated July inflation figures, with headline inflation at 3.5% and the trimmed mean at 3.6%, alongside robust household spending data showing a 7% year-on-year increase for July. These developments have led to a rapid increase in hawkish expectations in the market, with approximately 28 basis points of tightening now priced in for the Reserve Bank of Australia (RBA) by year-end, a 15-basis-point jump since the start of the week. Futures markets are aggressively pricing in an RBA rate increase to 4.60%.
Despite the market's hawkish shift, some institutions like ING and BBH maintain a view that the RBA will opt for a prolonged hold. ING's macro team expects inflation to be benign enough to prevent another rate hike, especially if the Federal Reserve also maintains a hold. They project an AUD/USD target of 0.730 by year-end but anticipate near-term gains will be limited as current rate pricing is unwound. Similarly, BBH suggests that restrictive financial conditions and a cooling labor market might push the RBA towards an extended pause, even though they acknowledge the AUD's attractive carry and commodity exposure as tailwinds.
The recent inflation data, however, has made the September RBA meeting 'live' for a potential hike, with a hike by year-end looking increasingly probable. TD Securities sees the July CPI as a clear inflation impulse, potentially forcing the RBA to abandon its wait-and-see approach. Commonwealth Bank of Australia (CBA) has also shifted its forecast, now expecting a 25-basis-point hike to 4.60% by November, aligning with six out of seven major banks. National Australia Bank (NAB) and Deutsche Bank anticipate a September hike, while CBA, ANZ, Goldman Sachs, and UBS lean towards November, leaving Westpac as the outlier expecting a prolonged hold at 4.35%. This consensus shift has already led to upward pressure on short-dated Australian bond yields and a 1.60% gain for the Australian Dollar against the US Dollar in 24 hours.
