Australian Dollar Crashes Despite USD Gains

The Australian Dollar and domestic bond yields slid lower after CPI came in lower than anticipated to reduce rate hikes pressures from the RBA.

Going into the CPI number, The AUD had been swaying around 0.6950 despite the USD strengthening against major currencies ahead of the Fed meeting later today. The market anticipates a 75- bp rate hike after the meeting.

 The Reserve Bank of Australia is squarely focusing on the AUD/USD for their meeting next Tuesday, 2nd August. The market was pricing at a 50- basis point hike; however, this probability was slightly lowered after CPI as it gave RBA the breathing space to increase rates gradually.

The 3- and 10-year Australian Commonwealth Government bond (ACGB) yields moved lower. When going to print, the 3-year ACGB is down by 14 bp at 2.99%, while the 10- year ACGB is 8 bp lower at 3.30%. The ASX 200 recovered from earlier losses and is currently trading around 6800.

The CPI number has given the RBA time to implement steady, measured rate rises rather than a very jumbo lift, such as the 100 bp rise by the Bank of Canada at the beginning of the month.

The tight labor market and healthy trade figures aid a continued hike by the RBA. The unemployment rate in June was at 3.5%, lesser than the 3.8% forecast and the previous 3.9%. The latest trade surplus of AUD 15.96 billion for the month of May was a big increase from the expected AUD 10.85 billion.

There is a constant fight against inflation in Australia. The global outlook remains somewhat vague as the Global central banks keep increasing rates, China remains on lockdown, and the Russian/Ukraine war continues. The International Monetary Fund (IMF) highlighted the risks attached to global issues overnight and warned of slowing global growth.