Summary:

• Australia headline CPI came in much below estimations
• Trimmed mean (the RBA’s preferred core gauge) was in line with forecast
• AUD weakens on the data and Lowe’s remarks

The long-awaited inflation report for Q2 from the Australian economy was revealed overnight. It was not reassuring though as headline CPI turned out to be much below than estimations. The headline measure was at 1.9% yoy while 2.2% yoy was forecast. On the other hand, the trimmed mean gauge (the RBA’s preferred core measure) came in at 1.8% yoy which was consistent with an estimation. In terms of a quarterly basis headline CPI was at 0.2%, whilst trimmed mean at 0.5%.

The underlying CPI measure proved to be much weaker than expected, whereas the trimmed mean gauge was in line with expectations. Source: xStation5

Besides, there is another measure of core inflation – weighted median CPI which showed a 1.8% yoy increase which was slightly higher than expected (1.7% yoy). However, given that the RBA’s attention is on trimmed mean a higher value of weighted median did not matter too much.

Moreover, we got remarks from RBA’s Lowe which referred to the inflation report among others. The most important headline are as follows:

• there is no need to move in a lock step with central banks which are tightening policy
• not seeking to stimulate a rapid increase in inflation because it carries financial stability risks
• there is low probability of a sudden revival in wages or inflation in Australia
• a gradual lift in wages growth is central to inflation outlook
• today’s CPI data in line with the RBA’s expectations
• it would be better if the AUD were a bit lower than it is
• higher power prices are hurting business and investment
• he is very comfortable with current setting of monetary policy

By and large, there were quite murky commentaries delivered by RBA’s Lowe, however they showed that there is not too much pressure on higher rates in the foreseeable future as wages growth is expected to be fairly subdued for a while. Furthermore, Lowe stressed that there is a lot of uncertainty around a neutral rate being at 3.5%. As a result, the Australian dollar is by far the weakest currency in G10. Beyond, there are not huge moves across the currency market.

The AUDUSD is giving back its prior gains and could keep up going down towards 0.7830 where a more notable support appears to be placed. Source: xStation5

The AUDUSD is sliding in the aftermath of the inflation report along with RBA’s Lowe comments. All of them showed little pressure on the RBA to hike rates in the foreseeable future. Hence, the AUD could wipe off its previous gains which have been made mainly in anticipation of an immediate change in rates, possibly as soon as the beginning of the following year.