The RBA maintained its current rate while delivering a hawkish message, emphasizing that the future inflation outlook remains uncertain and signalling a willingness to raise rates further if inflation escalates. Additionally, the RBA pushed back against market expectations for a rate cut in December. In contrast, RBNZ cut the 25bp yesterday and signals further rate cut is reasonable if the incoming data comes soft. Thus, the markets can expect the policy divergence between RBA and RBNZ.

AUD: Hawkish RBA

In the last trading week, the AUD remained under pressure due to global risk aversion, driven by escalating tensions in the Middle East, slower-than-expected Q2 GDP growth in China, and fears of a potential US recession. However, the AUD regained strength later in the week, bolstered by hawkish rhetoric from Governor Bullock during the August RBA meeting.

Governor Bullock highlighted the ongoing uncertainty surrounding Australia's inflation outlook, noting that inflation remains sticky. The RBA Board considered a rate hike during the August meeting, and a rate cut was explicitly ruled out. Later, Bullock reinforced her hawkish stance, indicating that the inflation target range is unlikely to be met until the end of 2025. She emphasized the RBA’s vigilance on inflation risks and readiness to raise rates again if necessary. Bullock also warned that markets are prematurely pricing in rate cuts, with expectations for the first cut in December.

Given this context, the RBA could be the only G10 central bank maintaining higher rates for longer, with the potential for additional hikes if inflation becomes more problematic. Coupled with the recent hawkish rhetoric from the RBA, the AUD may continue to strengthen in the near term, barring any significant negative developments from China or the Middle East.

Currency Strength Between AUD & CAD

NZD: Dovish RBNZ

In New Zealand's economic landscape context, the Q2 CPI fell to 0.4% q/q and 3.3% y/y, which, although somewhat encouraging for the RBNZ, still reflects inflation levels above the 1-3% target. Domestic inflation remains stubbornly high, with non-tradable inflation recorded at 0.9% q/q and 5.4% y/y. The Q2 CPI data adds to the growing evidence that the RBNZ's tightening measures may be sufficient, as weak demand and increasing spare capacity in the economy are beginning to lower domestic inflation. Given the recent slowdown in domestic activity and labour market indicators, the Q2 CPI marks the start of downside risks.

On the other hand, New Zealand's Q2 labour data exceeded expectations, even though the unemployment rate rose to 4.6% from 4.4%. This increase aligns with the RBNZ’s May MPS forecast, reducing speculation of an early rate cut. Additionally, the latest New Zealand 2-year inflation expectations fell to 2.03% from 2.33%, further signalling a cooling trend in inflation. The 2-year horizon is particularly significant for the RBNZ, as it considers this timeframe as the period in which its policy changes take effect.

The RBNZ cut its first 25bp yesterday and noted ‘the pace of further easing will depend on the Committee’s confidence that pricing behaviour remains consistent with a low inflation environment and that inflation expectations are anchored around the 2% target’. Additionally, the updated forecasts painted a dovish picture with a lower OCR projection (although more conservative than market pricing), a sizeable downward revision in 2024 headline inflation forecasts, and a worsened growth outlook. Overall, RBNZ remains dovish in the August meeting and is willing to cut the rate further if incoming data comes soft. As a result, markets can expect the NZD to remain under pressure compared to the hawkish RBA.

AUD/NZD Current Retail Sentiment

Disclaimer

This material is provided for informational purposes only and does not constitute financial, investment, or other advice. The opinions expressed in this material are those of the author and do not necessarily reflect the views of Trive International. No opinion contained in this material constitutes a recommendation by Trive International or its author regarding any particular investment, transaction, or investment strategy. This material should not be relied upon in making any investment decision.

The information provided does not consider the individual investment objectives, financial situation, or needs of any specific investor. Investors should seek independent financial advice tailored to their individual circumstances before making any investment decisions. Trive International shall not be liable for any loss, damage, or injury arising directly or indirectly from the use of this information or from any action or decision taken as a result of using this material.

Trive International may or may not have a financial interest in the companies or securities mentioned. The value of investments may fluctuate, and investors may not get back the amount they originally invested. Past performance is not indicative of future results.

For more information about Trive International, please visit http://trive.com/int

Additional Information

Investing involves risk, including the potential loss of principal. Diversification and asset allocation strategies do not ensure a profit or guarantee against loss. The content in this material is subject to change without notice and may become outdated or inaccurate over time. Trive International does not undertake any obligation to update the information in this material.

By accessing this material, you acknowledge and agree to the terms of this disclaimer. If you do not agree with these terms, please refrain from using this information.