A private inflation survey in Australia shows a decrease of -0.3% month-on-month, down from a previous increase of 0.9%. The year-on-year change is now 2.8%, slightly lower than the earlier figure of 2.9%.
Core inflation, measured by the trimmed mean in the survey from the Melbourne Institute, fell by 0.2% month-on-month in August. This brings the core inflation rate to 2.4% year-on-year, compared to the previous 2.6%.
Currency Movements
Following the release of these figures, the AUD/USD currency pair dropped to a session low of approximately 0.6537.
The drop in this private inflation survey is a clear signal that price pressures are easing faster than anticipated. We see this as a dovish development for the Reserve Bank of Australia (RBA), significantly reducing the chance of any further rate hikes. The market is now shifting its focus from “how high?” to “when will they cut?”.
With the official cash rate having been held at 4.35% for most of 2025, this data is crucial ahead of tomorrow’s RBA meeting. Looking at market pricing, overnight index swaps now show a 55% probability of a 25-basis-point rate cut by December, a jump from just 25% at the end of last week. This data provides a strong reason to believe the RBA’s next move will be down.
Investment Strategies
For our currency positions, the path of least resistance for the Australian dollar is now lower. We should consider purchasing AUD/USD put options to position for a potential break below the key 0.6500 psychological level. Selling out-of-the-money AUD/USD calls is another strategy to capitalize on the view that any rallies will likely be limited.
This disinflationary trend reinforces the idea that Australian bond yields have peaked. We can express this view by buying 3-year and 10-year Australian government bond futures, which will appreciate in value as yields fall. The 10-year yield, which was above 4.20% as recently as July 2025, could now credibly target a move back towards 3.80%.
The prospect of earlier rate cuts is a positive catalyst for the local stock market. After the sluggish performance of the ASX 200 during the high-rate environment of late 2024 and early 2025, this shift could ignite a rally. We should look at buying call options on the ASX 200 index to gain upside exposure, particularly in rate-sensitive sectors like technology and real estate.
