AUD rallies after hot Q3 CPI surprise - BBH

AUD outperforms across the board and Australian bonds sold off. Australia Q3 CPI was a material miss to the upside, effectively ruling out an RBA rate cut next week. Headline CPI rose 1.3% q/q (consensus: 1.1%) vs. 0.7% in Q2 to be up 3.2% y/y (consensus: 3.0%) vs. 2.1% in Q2, reflecting higher electricity costs as government subsidies unwound, BBH FX analysts report.

RBA seen on hold as policy futures slash easing expectations

"The policy-relevant trimmed mean CPI, which excludes the impact of irregular or temporary price changes like the rise in electricity prices, was also red-hot. Trimmed mean CPI increased 1.0% q/q (consensus: 0.8%) vs. 0.7% in Q2 to be up 3.0% y/y (consensus: 2.7%) vs. 2.7% in Q2. Trimmed mean CPI is tracking well above the RBA's 2.6% projection and will keep the RBA on hold for some time. In fact, RBA Governor Michele Bullock warned on Monday that if trimmed mean CPI came in at 0.9% q/q (it printed at 1.0% q/q) 'that would be quite a material miss'."

"Similarly, the monthly CPI indicator shows quickening inflation pressures. The CPI indicator rose 0.5pts in September to a 15-month high at 3.5% y/y (consensus: 3.1%) and trimmed mean CPI increased 0.2pts to a six-month high at 2.8% y/y. The Australian Bureau of Statistics (ABS) will be transitioning from the quarterly CPI to a complete monthly measure of the CPI on November 26. The Monthly CPI will become Australia's primary measure of headline inflation, replacing the quarterly CPI."

"RBA cash rate futures slashed bets of a November 4 rate cut to virtually zero from over 50% before Australia's Q3 CPI release. Over the next 12 months, cash rate futures price in just one 25bps cut (down from nearly 50bps) and the policy rate to bottom at 3.35%. Bottom line: AUD/USD can edge higher as the RBA is on track to ease more cautiously than the Fed and global economic activity is resilient."