The headline inflation measure fell unexpectedly in the second quarter, printing at 1.9%y/y versus 2.2% expected and down from 2.1% in the previous quarter. This lacklustre reading should be viewed in the context of significantly overly optimistic market participants about the eventuality of a tightening move from the Reserve Bank of Australia. AUD/USD slid 0.50% to 0.7878 this morning as investors priced in the info.
Looking at the details, there is no reason to panic as the core measure remained stable, with the trimmed mean holding up at 1.8%y/y while the weighted mean edged up to 1.8% from 1.7%. Most of the decline in the headline measure is to falling automotive fuel and food and non-alcoholic beverage prices. Overall, tradable components fell 0.3%q/q, while non-tradable components rose 0.4%q/q.
Despite a minor reversal, the Aussie held ground on Wednesday as investors continue to anticipate the RBA will start lifting borrowing costs as soon as Q2 2018. We take a more cautious approach as we believe the central bank is also keen to keep the Australian economy competitive on the international level and with falling inflation measure across the globe, a delay in the tightening process is more than likely.
In the FX market, the Australian dollar had a nice ride since early May. The Aussie rose more than 7% against the greenback, 6.40% against the pound sterling and 5.30%against the Japanese yen. However, we believe there is room for a correction, especially against the US dollar. Indeed, speculators have bet heavily on the Aussie as highlighted by the latest CFTC’s COT report. Long AUD speculative positions rose the highest level since 2013, reaching 43.60% of total open positions. This extreme positioning together with the AUD’s recent sharp rally will likely trigger some significant profit taking. AUD/USD has been unable to break the 0.80 threshold to the upside. From our standpoint, a correction towards the 0.76 area would be more than healthy.
By Arnaud Masset