No More Reason for RBA Not to Cut As Australian Inflation Falls

The AUDUSD remains robust, hitting a new high since July 2023, driven by the Federal Reserve’s 50 basis point rate cut and improved risk sentiment due to Chinese stimulus measures. The weakening U.S. dollar has further contributed to the pair’s rally. Since early August, when the AUD/USD dropped to a low of 0.6350, it has gained more than 5 cents, despite the Reserve Bank of Australia (RBA) maintaining a hawkish stance with no signs of cutting rates.

The pair’s upward momentum was also fueled by China’s efforts to revitalize its economy, particularly through the People’s Bank of China (PBOC) loosening lending standards. The PBOC announced a 50 basis point cut in the Reserve Requirement Ratio (RRR), releasing nearly 1 trillion yuan for new loans. This stimulus is significant, as China is Australia’s largest trading partner, and the AUD/USD reached a new high for the year, nearing 0.68.

AUD/USD Chart Daily – Breaking Above the 100 SMA

Trading within a bullish channel, the pair is poised to break through this level, with potential targets of 0.69 and 0.70 in the near term. However, high interest rates from the RBA are creating economic challenges in Australia, with households saving more, curbing consumer spending, and slowing the economy. Additionally, price pressures are easing, as reflected in last night’s lower CPI inflation data.

Australian Inflation Report for August

• Australian August CPI (Y/Y):
  • Came in at 2.7%, below the expected 2.8%.
  • Previous month: 3.5%.
  • This marks the lowest inflation rate since August 2021, indicating a notable cooling in price pressures.
• Month-over-month CPI:
  • Reported a -0.2% decline, highlighting a slowdown in monthly price increases and adding to evidence of easing inflation.
• Trimmed Mean CPI (Y/Y):
  • 3.4%, matching market expectations.
  • Previous month: 3.8%.
  • This measure, which excludes the most volatile items, also shows a decline, reinforcing that core inflation pressures are softening.
• Implications:
  • The drop in inflation, particularly the y/y figure, gives the Reserve Bank of Australia (RBA) more leeway to pause on further rate hikes.
  • However, with trimmed mean inflation still above the target, the RBA will likely continue monitoring incoming data before deciding on policy adjustments.

AUD/USD Live Chart