FX Daily: London AUS and Q2 CPI, AUD/NZD and RBNZ

[RTFX-Trading]

FX Daily: London
AUS and Q2 CPI, AUD/NZD and RBNZ
Looking for Australian Q2 CPI to Boost AUD/USD
While USD weakness has been in our view the overriding driver of recent AUD/USD and NZD/USD strength in recent weeks, the importance of domestic events in both Australia and New Zealand will likely provide more of a domestic focus this week. First up is the Q2 CPI in Australia, with the outcome likely to be crucial in whether the RBA hikes following its August Board meeting. Following today's higher-than-expected PPI print our Australian economists now expect the key RBA underlying measures to print at 0.8% in the quarter (market median is for a 0.7% rise). If this is in fact the case they suggest that the RBA is more likely than not to hike 25 bps August 8. Even following today's PPI data, however, the interest rate market continues to price less than a 40% chance of a tightening by the RBA in August. We therefore see both the economic and market risks a s skewed towards a higher CPI outcome that boosts AUD. We continue to target a move higher in AUD/USD to 0.8950.

Upside Risk Skew in AUD/NZD from RBNZ Decision
Our NZ economist looks for the RBNZ lift the OCR further to 8.25% this week, but views it as a very close call. With this tightening fully priced into interest rate markets over coming months, however, and with a tightening next week around 2/3 priced, the risk on the day appear to us skewed towards NZD weakness. We do not see these risks as enough of a reason to sell NZD/USD though given the seemingly entrenched nature of the USD downtrend. We do though see the risk skew around the RBNZ decision as supportive of our bullish AUD/NZD view given AUD's is also as a high yielding currency. And the risk skew we noted around the Australian CPI data also supports this position. We also see the resilience of the cross since we initiated our bullish view to softer employment data in Australia and stronger retail and CPI data in NZ (and resulted widening in NZ- Ausralian rate differentials) as bullish price action. In our view the resilience reflects a growing sense in FX markets that the NZ data is beginning to (ever so slowly) soften, in clear contrast to the outlook for further strong Australian data. So we c ontinue to target a move to 1.1475 (near the highs for the year).