AUD felled by softening in inflation pressures

Daily Currency Update

The AUD fell sharply lower through trade on Wednesday, giving up more than 1% as markets pared RBA rate hike expectations. A softening in domestic inflation pressures through May prompted investors to scale back expectations for future rate hikes dragging the AUD below supports at US$.6680 and toward intraday lows just above US$0.66. The latest monthly CPI report showed prices rose just 5.6% year on year, well below market expectations and even though prices across core goods and services remain elevated, the sharp decline was enough to pare back peak rate expectations. Analysts now anticipate the RBA will leave rates on hold through July and August with the next priced-in rate hike not until September and only 35 points of tightening price into the curve through year-end. The sharp correction in yield expectations and risk-off mood has seen a firm rejection of the AUD on approach to US$0.69 and we are again entrenched within a well-defined range between US$0.6580 and US$0.68. We expect the AUD will continue to track between lows at US$0.6480 and the mid-month high just short of US$0.69 through July.

Our attentions turn now to domestic retail sales data. A soft read in line with expectations will help firm calls for the RBA to again pause the tightening cycle next week.