AUD Gains Despite Hawkish Expectations
The Australian Dollar (AUD) is bucking the trend among G10 currencies this week as hotter-than-expected inflation data and strong household spending numbers fuel hawkish expectations for a rate hike by the Reserve Bank of Australia (RBA).
ING's macro team still expects a prolonged RBA hold, but admits that the risks have increased due to the recent inflation data. The July inflation rate was 3.5% headline and 3.6% trimmed mean, causing markets to price in a 28bp hike by year-end, up from a 15bp increase since the start of the week.
The team notes that household spending has been strong, increasing 7% YoY in July, but also points out that house prices are declining and unemployment has edged higher. These trends should become clearer when the 2Q GDP data is released.
The RBA is likely to wait for another set of quarterly numbers before concluding whether the pickup in inflation is a one-off or not. Markets are currently pricing in 12bp for the 29 September meeting, which ING expects will be unwound, limiting AUD gains for now.