Goldman now expects an RBA hike to 4.60% in November after a broad July inflation surprise, adding fresh rate support to the Australian Dollar.
The Australian Dollar to US Dollar (AUD/USD) exchange rate ended Friday at 0.7163, still 1.7% higher in August despite losing 0.45% after Warsh’s Jackson Hole speech.
Goldman Sachs has made a more important change underneath that price action.
“Australia’s headline CPI increased 1.0%mom in July, with year-over-year growth easing 30bp to 3.5%yoy – above our and market expectations,” economists Andrew Boak, Will Maher and Oscar To said.
Underlying inflation was stronger as well.
“The ABS monthly trimmed mean measure increased by 0.5%mom in July,” while annual trimmed-mean inflation remained at 3.6%, “also above expectations”.
More troubling for the Reserve Bank was the breadth.
“Price pressures also broadened in July: market services inflation accelerated, and consumer durables… rose by more than we expected.”
Goldman consequently raised its third-quarter trimmed-mean forecast to 0.93% quarter-on-quarter and concluded that the surprise “takes further tightening from ‘quite possible’ to most probable”.
The policy call changed with it.
“We now expect the RBA to hike 25bp in November to 4.60%,” Goldman said, while stressing “a material risk of an earlier RBA rate hike in September.”
Reuters data show the inflation release initially drove AUD/USD to a 12-week high around 0.7183 and lifted the market-implied probability of a September move to 38% from 17%.
Friday’s Dollar surge subsequently knocked AUD/USD lower, but it does not alter Goldman’s domestic argument.
The next decisive releases are Australia’s labour-market report and August CPI.
A second broad inflation surprise would make November increasingly difficult for the RBA to avoid and could revive the Australian Dollar’s yield advantage.
Our currency coverage draws on live market data, official economic releases and published bank research.
