Preview: Slowing economy may steer RBA to pause rate hikes

Last week, the retail sales report for April became the latest economic release during May to show that the RBA’s rate hiking cycle is having the desired impact and slowing the economy.

Attention now turns to the release of the Monthly CPI Indicator on Wednesday.

To recap, retail sales were flat (0.0%) in April, below market expectations looking for a 0.3% rise. The subdued retail sales number followed weaker-than-expected wages and employment data earlier this month.

At its monthly board meeting in May, the RBA surprised the market and raised the cash rate by 25bp to 3.85%. The RBA warned that it could again lift rates in June, but it would depend on how the economy and inflation evolved.

An inline or softer-than-expected Australian Monthly CPI indicator would become the fourth data point this month to support current market pricing the RBA will keep rates on hold at 3.85% when it meets next week.

What is expected?

In March, the monthly CPI indicator rose by 6.3% YoY, falling from 6.8% in February. It was the third month in a row that the indicator has fallen, extending its decline from a peak of 8.4% in December. The softer print in March was mainly due to a softer pace in the growth in housing and transport prices.

For April, the monthly CPI indicator is expected to rise by 6.4% YoY, driven by price rises in food, clothing and footwear, housing, and transport costs. The range of expectations varies from 5.9% to 6.6%.

A print of 6.2% or less would be welcomed by the interest rate market fully priced for the RBA to remain on hold in June and a minor negative for the AUD/USD.

A print of 6.6% or higher would likely see the market increase the chances of an RBA rate hike in June and be a slight positive for the AUD/USD.

AUD/USD technical analysis

The AUD/USD closed lower last week at .6517 (-2.01%), at fresh seven-month lows, courtesy of soft commodity prices, surging US yields and weak eco data in Australia and China. The break of range and year-to-date lows, the .6565 area, was a bearish development and warns of further losses towards .6350.

One point of bearish concern is that the latest Commitment of Traders positioning report shows that the market is short the AUD/USD to the tune of about 50k contracts. An ability to reclaim resistance at .6620/40 would likely be enough to trigger a short-covering rally in the AUD/USD.

AUD/USD daily chart

_{TradingView: the figures stated are as of May 30, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}