The Trade Week Ahead – It’s Still Domestic

This week’s trade week is dominated by macro data being the start of February It will be the first meeting of the calendar year for most central banks – The Fed the RBA, the Bank of Canada, the Bank of England and the Bank of New Zealand all meet or the first time over the coming 10 working days.

The central bank of the week: The Fed, which is meeting for its first meeting of the year on Thursday night. As it is not a scheduled press conference meeting there will be no change to the Fed funds target rate. However, it is the final meeting for incumbent Janet Yellen.

I for one will miss her at the helm; her steady hand has guided markets through a particularly eventful period. She has embodied her tenure through structured communication and artfully handling differing policy stances having picked up from previous Chair Ben Bernanke’s QE program to the beginning of Quantitative Tightening (QT) and oversees first rate rises in the post-GFC era. Could this mean that the statement (and particularly the minutes) be a ‘signoff’ piece that defends her handling of these events over her time as Chair?

Either way – markets are forward looking beasts therefore anything that is said on Thursday is retrospective and from a previous administration – markets will be looking to statements from incoming Chair Jerome Powell.

Moving to the data releases Europe’s Q4 GDP numbers are due on Tuesday – The only question that matters here: is the growth renaissance under way? Any signs of weakness or underperformance will put a few ‘bears’ into depth screens. EURUSD is powering ahead on the forecasted prospects for Europe – clear event risk here for the pair.

On the topic of quarterly releases Europe and Australia both see the release of their respective Q4 inflation numbers. However, its Australia’s inflation on Wednesday that is of particular interest for the currency and from a monetary policy perspective.

The back end of 2017 saw several forecasts of possible syntonisations of G10 central banks rate increases in 2018 – this however ignores the core rule of a central bank. It is governing a domestic economy – therefore it is domestic data that will govern its decisions and rate movements.

This brings me to Australian CPI on Wednesday as it will illustrate why the RBA will not follow global peers into moving rates.

Here is Australia’s core inflation reads dating back to December 2012.

The yellow line is the seasonally adjusted CPI figures which are heavily influenced by fresh produce and energy which is why the RBA likes to strip these out and concentrate on the trimmed mean figures – the blue line. I have added the blue shaded area – this represents the mandated target band the RBA has for trimmed mean inflation.

As the chart clearly illustrates trimmed mean inflation has not crossed into the band since the final quarter of 2015, it has flat-line for the previous three quarters and the prospect of its entering this band seem remote considering CPI fell away in Q3.

With inflation being the core mandate of the RBA arguments for lifting rate due to the housing market or domestic growth or global factors are missing the point of what the RBA is for – maintaining inflation. Interestingly, one could make an argument that rates could actually be lower considering inflation isn’t materialising. However, this is when housing and growth factor as it would create overheating.

Considering the last Statement of Monetary Policy (SoMP) forecasted core CPI to reach 1.75% by December this year – a further flat line read on Wednesday will all but confirm inflation will remain benign and the RBA can continue to peach itself the fence as it has done for the past 17 months and counting.

Certainly bring the AUDUSD into focus – is it really worth 80.5c in the medium term with the Fed hawkish and the RBA neutral?

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