With the stronger-than-expected Australian Monthly CPI, Wednesday's Q2 CPI will be important to determine RBA’s August action, and the inflation risk remains to the upside. In contrast, BoC is willing to cut the rate further, thus weighing on CAD.

AUD: A better week ahead?

The recent weakness of the AUD was triggered by a risk-off sentiment, driven by fears of intervention from the BoJ, which led investors to shift towards safe-haven currencies, dragging down the Antipodean currencies. Additionally, global equity markets experienced a significant sell-off due to disappointing reactions to earnings from Alphabet and Tesla, despite Alphabet reporting better-than-expected results, which also weighed on the AUD. Furthermore, China's PBoC introduced several easing measures aimed at stimulating economic activity. Specifically, the central bank reduced the rate on its 7-day reverse repo from 1.8% to 1.7%, marking the first reduction since August of the previous year. The PBoC also lowered the collateral requirements for medium-term lending facility loans to increase the availability of tradable bonds and implemented a 10-basis point cut to both the one-year and five-year loan prime rates (LPRs), bringing them to 3.35% and 3.85%, respectively.

Looking ahead, external factors will continue to pose a risk to the AUD, though they will not be the primary drivers. Notable upcoming events include the release of earnings reports from Microsoft, Meta, Apple, and Amazon. Next week’s China PMI data release is unlikely to improve the outlook for the Antipodean currencies.

Domestically, the focus will be on retail sales and Q2 CPI data, which will influence the direction of the RBA’s August meeting. Retail sales saw an unexpected increase in May due to colder-than-usual weather spurring a rush for winter clothing, further boosted by retailers bringing forward their mid-year sales. As a result, retail sales data is likely to retrace in June. The RBA will likely focus on the trend decline in retail sales, which may make it hesitant to hike rates.

However, Q2 inflation data will be the ultimate determinant of whether the RBA needs to raise rates further. The RBA has indicated little to no tolerance for inflation exceeding its forecasts. It expects its main measure of underlying inflation, the trimmed mean, to drop to 3.8% y/y in Q2 from 4.2% in Q4. For this optimistic forecast to materialize, q/q trimmed mean inflation would need to fall to 0.8% in Q2 from 1.0% in Q1. So far, monthly inflation data for Q2 suggest q/q trimmed mean inflation is tracking closer to 1.0%. If trimmed mean inflation reaches 1.0% or higher, the RBA may have to hike rates in August or September, which would push the AUD higher. All in all, while external risks could further drag the AUD, the upcoming inflation report points to an upside risk, supporting the case for buying AUD on dips before its release.

CAD: A better week ahead?

As expected, the BoC performed a second rate cut during its July meeting and signalled openness to further cuts if incoming data remains weak, which will add additional pressure on the CAD. Furthermore, the BoC indicated a shift in focus towards downside risks, citing more excess supply in the economy. The case for lower rates was bolstered by the BoC’s downgrade of its core inflation forecasts by 0.1 points for both 2025 and 2026. Although a few inflation components, such as shelter and services inflation, remain elevated, the BoC noted that risks to the inflation outlook are now balanced, compared to the concerns about upside risks expressed in the April meeting.

In the week ahead, the focus will be on Canada's May GDP, as the country faces domestic growth concerns. Any significant downside in GDP could further increase selling pressure on the CAD. As a result, a dovish stance in the July meeting could continue to weigh on the CAD. The latest COT report revealed that leverage funds increasingly favour short positions on the CAD, adding more shorts last week.

AUD/CAD 4H

Currency Strength between AUD & CAD

Current AUD/CAD retail sentiment

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