Australia: Falling inflation to keep RBA easing, short AUDUSD on tactical/cyclical alignment

Yields in Australia remain elevated among G10 even as inflation there falls. We are short AUDUSD based on further rate cuts from the RBA and bearish readings from tactical and cyclical models.

Our Policy Regime model shows the RBA as the latest central bank to be in an “easing regime”. This is consistent with signs that inflation is likely to fall further towards the bottom of the RBA’s 2-3% CPI target range. Our inflation LEI is edging lower, and inflation breadth continues to decline.

Meanwhile, our fundamentals-based FX Edge model fell further last month, pointing to negative 1-year forward returns for AUDUSD.

On top of these cyclical indicators of weakness, our tactical models also point to short-term pressure for AUD. For example, our Tactical Outlook model triggered August 14th, and AUD’s breadth relative to G10 currencies has been weak over the past few months.

We are adding short AUD exposure to our short EUR exposure to play a tactical rebound in the USD.