AUD Surges on Hotter-Than-Expected CPI Data

The Australian Dollar (AUD) has been gaining strength after the release of hotter-than-expected July Consumer Price Index (CPI) data. The data showed that headline CPI inflation rose by 1.0% month-over-month, exceeding expectations of a 0.9% increase. This was driven in part by increases in automotive fuel and clothing prices.

On an annual basis, headline CPI inflation eased less than expected to 3.5%, compared to consensus estimates of 3.3%. The trimmed mean CPI remained at 3.6% for a second straight month and is tracking above the Reserve Bank of Australia's (RBA) end-December forecast of 3.3%. RBA cash rate futures now almost fully price a 25bps hike to 4.60% by year-end, up from 60% before the July CPI data.

Despite this, Elias Haddad from Brown Brothers Harriman (BBH) still sees risks skewed towards an extended pause in the RBA tightening cycle. He notes that policy is already somewhat restrictive and the labor market is softening. However, he also highlights Australia's attractive carry alongside its strategic exposure to commodities linked to energy, AI, and defense as key AUD tailwinds.