RBA Minutes: 2Q CPI to decide it all

The RBA minutes surprised Aussie dollar bears today, showing that the decision to cut rates at the meeting earlier this month was far closer than many had expected.

Source: Bloomberg

The AUD/USD rallied 0.9% immediately on the release as doubts were cast over the likelihood of future rate cuts. The market pricing for another rate cut in August dropped to 51%, and as far as the market is concerned the 2Q CPI print will largely decide the entire trajectory of interest rates. 2Q CPI is set to be released on 27 July.

On the chart, it looks like the Aussie was ready for a pause after such a rapid move down from US$0.78. It recently bounced off a clear support line around US$0.7240, but has run into resistance around the US$0.7375 level as well. A break out of this range will be key in deciding its future direction. But bear in mind, the nascent strength in the US dollar will have a major influence on the Aussie as well as Australian domestic factors.

The key line at the end: “On balance, members were persuaded that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.” This line has largely put to bed market bets for a rate cut in June.

2Q inflation will be incredibly important, but, to see another rate cut in August, 2Q inflation may actually have to drop below 1.3% YoY. Looking at a rough calculation of the real interest rate in Australia, 0.5% seems to be the RBA’s red line for the real interest rate. For most of the past three years, every time real interest rates have risen above 0.5% the RBA has moved. Currently, with the policy rate set at 1.75% and CPI at 1.3%, the real rate is sitting at 0.45% - just under the 0.5% line. Meaning, 2Q CPI probably needs to drop to 1.2% or lower to definitively lock in an August rate cut.

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