Hot July CPI Lifts Aussie Dollar Rate Hike Bets and Carry Appeal

Australia's July Consumer Price Index (CPI) data came in hotter than expected, lifting Reserve Bank of Australia (RBA) rate hike expectations. The Australian Dollar (AUD) is outperforming as a result, benefiting from attractive carry and commodity exposure.

Headline CPI rose 1.0% month-over-month (m/m), beating the consensus forecast of 0.9%, while easing less than expected to 3.5% year-over-year (y/y). The trimmed mean CPI remained at 3.6%, tracking above the RBA's end-December 3.3% forecast.

RBA cash rate futures now almost fully price a 25 basis point hike to 4.60% by year-end, up from 60% before the July CPI data. However, Elias Haddad of Brown Brothers Harriman (BBH) still sees risks skewed towards an extended pause in the RBA tightening cycle.

This is due to policy being somewhat restrictive and the labor market softening. Nevertheless, Australia's attractive carry alongside its strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds.