Australian Dollar Boosted by Inflation Print

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A monthly tracker of Australian inflation showed why the Reserve Bank of Australia (RBA) will be the last developed market central bank to cut interest rates.

The Australian Dollar rose after the CPI indicator came in at 3.6% year-on-year, above the consensus estimate of 3.4%.

"April's above-consensus Australian CPI print has hit the local bond market and serves as a reminder that the Reserve Bank of Australia may not be done hiking," says Chris Turner, Global Head of Markets for UK & CEE at ING Bank.

The CPI indicator is a monthly measure of a portion of Australia's inflation basket and gives economists a good sense of how the complete quarterly inflation print will pan out.

"AUD/USD rose modestly by about 0.2% to near 0.6665 after the stronger than expected Australian April CPI indicator," says Carol Kong, a strategist at Commonwealth Bank of Australia.

The Pound to Australian Dollar exchange rate is softer on the day at 1.9168 as it continues to give back some of the previous week's advance. "We have a long-standing bearish call on EUR/AUD and we see the recent run-up in GBP/AUD from 1.90 to 1.92 being completely reversed over the next month," says Turner.

The Australian Dollar has been one of the best performers in the G10 currency family over the past two months, helped by fading expectations for RBA interest rate cuts. These inflation data will only reinforce the market's belief that the RBA won't cut until the first quarter of 2025, well behind other central banks.

Above: Australian monthly CPI tracker. Image: Commonwealth Bank of Australia.

"It is worth noting a tension in the forecast which suggest an upside surprise in the underlying fundamentals for inflation," says Justin Smirk, Senior Economist at Westpac. "The quarterly surveyed clothing & footwear prices were stronger than expected which will see an upwards revision to these components in our June quarter CPI forecast. Assuming all else is held constant, this would suggest an upward revision to our forecast."

Smirk notes that core inflation measures lifted from 4.1% to 4.2%, while the Trimmed Mean measure lifted from 4.0% to 4.1%, the fastest pace since the 4.6% reported in November 2023.

This is the last inflation print that the RBA will receive before its June meeting, and there is nothing here to suggest they will drop their cautious approach.

A 'higher for longer' RBA would mean the AUD can continue to rely on interest market dynamics to deliver outperformance.