AUD: Inflation Cooling, but Carry Trade Still Provides Support – BBH

Australia's inflation data is expected to cool further, but the Australian dollar's appeal in carry trades has not faded. BBH analyst Elias Haddad noted that the upcoming July CPI data is expected to show both headline inflation and trimmed mean inflation moving lower, consistent with the country's recently softening labor market and slowing wage growth.

**Cooling Inflation Reinforces Expectations of Central Bank Pause**

The easing of inflationary pressures provides more room for the Reserve Bank of Australia (RBA) to remain on hold. Market reports indicate that private sector wage growth has fallen to a four-year low, undermining the foundation of domestic demand-driven inflation. Although futures markets still price in some possibility of a final rate hike this year, BBH believes that given the current policy rate is already near the upper end of the model-estimated nominal neutral rate range, and the RBA expects real GDP growth to remain below potential over the next two years, the risk leans more toward a prolonged pause. The RBA's assessment of inflation and economic growth prospects in its August monetary policy statement will be key for the market to gauge its next move.

**Carry and Commodity Attributes Provide Support**

Despite rising risks of a rate pause, the Australian dollar has not lost key support. BBH emphasized that Australia's attractive interest rate differentials and the currency's broad exposure to commodities continue to provide a buffer for the exchange rate. Even if the RBA holds rates steady, its 4.35% cash rate remains advantageous among major developed economies, keeping carry trades—borrowing in low-yield currencies and investing in the Australian dollar—active, thereby building a relatively solid floor for the currency against the backdrop of softening inflation data.