Australian Dollar: Softer CPI complicates hike odds – TD Securities

TD Securities’ Global Rates, FX & Commodities Strategy team reviews April Australian CPI, noting headline inflation undershot consensus while the trimmed mean matched expectations. Analysts highlight that fuel excise cuts and declines in several components drove the downside surprise, but key underlying measures like Ex Volatile Items and Electricity and Housing CPI remain firm, leaving the Reserve Bank of Australia’s August policy decision finely balanced.

Inflation mix clouds RBA outlook

"Headline Australian CPI for Apr landed at 0.4% m/m, +4.2% y/y, coming in below consensus at +0.6% m/m, +4.4% y/y and down from 4.6% y/y in Mar. The key driver for the downside m/m miss in Apr was Fuel, detracting 0.28% pts thanks to the Federal Govt cutting the fuel excise. Other key segments aiding the softer outcome were Transport Fares (-0.07% pts), Wine (-0.03% pts) and Electricity (-0.02% pts)."

"In annual terms, the items that eased pressure the most on inflation were International Holiday and Travel, shaving 0.10% pts and Transport Fares lopping 0.073% pts, while the percentage of items in the basket growing annually >2.5%, >3%, >4%, >5% eased vs Mar. Meanwhile, the trimmed mean measure was in line with market expectations, +0.3% m/m, +3.4% y/y, a fresh high based on the monthly series."

"Rates markets are clearly cheering the softer headline outcome but other series we like looking at in the monthly print are the Ex Volatile Items and Electricity outcome, +0.7% m/m (3.55% y/y) and Housing CPI (rents & cost of building a new dwelling) +0.46% m/m (4.1% y/y), both remaining firm in annual terms. That said, if the trimmed mean outcome for May lands at +0.3% m/m or below, the odds of the RBA hiking at its August meeting would diminish quickly, a key risk to our call for a final 25bps RBA hike at that meeting."