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The RBA rate cut is already 'in the price'.
The Australian Dollar can extend gains in the coming months, despite a midweek inflation report nailing on an interest rate cut next month.
The Reserve Bank of Australia (RBA) will proceed with an interest rate cut of 25 basis points in August say econmists, after it was reported inflation rose 0.7% q/q in the second quarter.
This was down on the previous quarter's 0.9% and below consensus forecasts for a 0.8% reading. The annual rate fell to 2.1% from 2.4%, which was less than the 2.2% consensus expectation.
"Inflation is within target. RBA likely to continue reducing monetary restrictiveness, including by cutting the cash rate at its August meeting," says Luci Ellis, Chief Economist at Westpac Group in Sydney.
However, the trimmed mean reading, which is the RBA's preferred 'core' measure of inflation, was still elevated at 2.7% y/y, even if it had cooled somewhat from 2.9% in the first quarter.
For currency markets, there should be enough progress in the data to allow the RBA to extend its interest rate cutting cycle next month.
On paper this looks to be a set of developments that would weigh on the Australian Dollar; however, the currency is trading with a robust tone at the time of writing, suggesting little negative impact.
This is potentially because the market was effectively 'fully priced' for a rate cut next month heading into Wednesday's print. With market opinion unable to shift much as a result, AUD walks away unscathed from the release, and is free to extend gains from here.
"With 23bp priced for the August RBA meeting, we expect AUD to gain through the coming weeks," says a recent strategy note from Morgan Stanley.
Above: GBP/AUD risks being pushed below range boundaries by a strengthening AUD.
Minutes from the RBA's July meeting revealed that the Board decided to leave rates on hold because it wanted to move "in a cautious and gradual manner."
"Pricing is therefore unlikely to shift to a 50bp cut – even if labour market conditions continue to decline and CPI softens more than anticipated – given the RBA's stated intention to proceed deliberately," says Morgan Stanley.
Analysts at Bank of America see the potential for the RBA to adopt a more 'hawkish' profile than currently expected, on condition of the firm economic profile in Australia.
"Rising housing market momentum, above-average credit growth, rising job vacancies and declining underemployment are all consistent with our view that policy is only marginally restrictive," says Bank of America.
BofA sees a risk that the RBA raises its medium-term inflation projections, meaning the RBA has little scope to lower interest rates by much.
BofA estimates the neutral nominal rate in Australia is closer to 3.5%, which is not far from current rates and implies there is only one more 25 basis point cut until policy risks becoming stimulatory.
Given the risks of a 'hawkish' shift in RBA guidance, BofA thinks there is a benefit in betting on Australian Dollar gains.