(25 OCTOBER 2017)DAILY MARKET BRIEF 1:AUD loses ground amid disappointing inflation data

The Australian dollar took a hit during the Asian session after the release of disappointing inflation data. AUD/USD slid to 0.7707, its lowest July since mid-July, as investors discount further a hawkish shift from the Reserve Bank of Australia. The Australian economy started the year positively suggesting that the country had successfully reduced its dependence to the mining sector, while on the inflation front, price pressure was finally picking up.

Nevertheless, over the last few month clouds started to gather at the horizon. Over the summer, the pace of retail sales growth slid into negative territory, while the minutes of the last RBA meeting came with a dovish done which suggest the central bank is in no hurry to lift interest rate before at least mid-2018.

Released this morning, the weak inflation data for the third quarter was the final nail in the coffin for a hawkish shift from the RBA as the institution has now a legitimate excuse to wait longer and can save its “Aussie strength” argument for later. The consumer price index growth fell to 1.8%y/y (versus 2.0% expected) compared to 1.9% in the second quarter. The trimmed mean measure held at 1.8%y/y, below expectation of 2.0%.

We maintain our bearish on the Aussie, especially against the greenback, as the political situation is moving in the direction for investors which should revive the reflation trade. In addition, the Fed has initiated the process to unload its balance and is expected to lift borrowing cost one more time before the end of the year. It definitely makes a good case for betting on the greenback.

By Arnaud Masset