AUD/CAD weakens as slowing inflation eases RBA rate hike pressure

Key points

The Australian Dollar weakened against its Canadian counterpart on Wednesday, after data showed inflation in Australia had decelerated more than anticipated in the second quarter, which eased pressure a bit for another interest rate hike by the Reserve Bank of Australia.

Annual headline inflation in Australia slowed to 6% in the second quarter from 7% in Q1, compared with market consensus of 6.2%.

It has been the lowest inflation figure since the third quarter of 2022, as food prices rose at the slowest pace in a year. Price increase also slowed for transport, housing, furnishings, health and recreation.

However, services inflation remained persistent, while rising to a new 22-year high of 6.3% in the quarter.

“The inflation picture suggests the risk remains of some further tightening in Australia in the next few months but that at the same time we are close to the peak in interest rates,” NAB economists wrote in an investor note, cited by Reuters.

The National Australia Bank no longer forecasts a RBA rate hike next month, while Goldman Sachs now forecasts two more rate hikes to a peak cash rate of 4.6%.

Markets are now expecting interest rates to peak at 4.32% by year-end, compared with 4.42% prior to the data release.

Investors scaled back bets on another RBA rate hike at its policy meeting next week. Futures markets are now pricing in a 31% chance of a 25 basis point rate hike, compared with a 50% chance before the CPI inflation report.

Meanwhile, CAD traders will be paying attention to the minutes of Bank of Canada’s July meeting, due to be released at 17:30 GMT, for more insight into the central bank’s thinking.

The Bank of Canada raised its overnight rate target by 25 basis points to 5% in July, in line with market expectations.

As of 7:19 GMT on Wednesday AUD/CAD was edging down 0.24% to trade at 0.8924.