Once again, the week is being framed by the currency market and the movements in the DXY continues to catch everyone’s attention. At sub-89 and with minimal support the USD weakness is overriding all normal trading however I need to highlight the plight of the AUD and its near-four year high. Is it sustainable?
I have highlighted in the video that this week sees The Bank of England (BoE) and The Reserve Bank of New Zealand (RBNZ) meeting for the first time this year while the European Central Bank (ECB) meets for a second time in 2 weeks to discuss the 2018 policy outlook. The EUR is clearly trying to test the $1.25 level however this meeting is unlikely to be the catalyst for it, yet stranger things have happened.
My perspective, this week is about the RBA meeting for the first time in 2018 on Tuesday and the first time since December 5 there while also releasing a new Statement of Monetary Policy (SoMP) on Friday –as a policy watcher and a currency watcher it’s a big week.
The market and the CPI numbers from last week means there will be no movement in the cash rate on Tuesday. Trimmed mean inflation registered 1.8% year on year last week – meaning core CPI has been unmoved for four consecutive quarters; it was also the ninth consecutive quarter outside of the targeted 2% to 3% target. A Tuesday rate hike is out, the question becomes – is the RBA out for the remainder of 2018? I would advocate yes.
This is where the markets divided: both the interbank and the swaps markets saw their pricing of probability of a 25-basis point (bps) rate hike come December 2017 falling by up to 8% post the release of the fourth quarter CPI. Bloomberg’s World Interest Rate Probability index has fallen to 65.6% chance that the RBA will increase rate by December 2018 it was as high as 80.5% just seven days ago. However, the AUD has remained stubbornly high over the past three months and despite the CPI and the interest rate markets hasn’t fallen as one would expect (the USD story is clearly to blame).
Looking to the statement – it is unlikely to undergo a huge revamp – with the RBA facing the persistent issue of low inflation an argument could be made for lower rates however that the board will defend its position of not cutting rates due to the growth in the world and domestic economy, the housing market and Australia’s net exports – all positive factors and reasoning for holding rates at current levels.
It is also likely to highlight the movements in Chinese growth and output which it would argue should filter into economic positives for Australia over time. This kind of data is due this week with the Chinese trade balance and CPI on Tuesday and Thursday respectively – another set of input for AUD trading this week.
However, these points from the Statement brings Friday’s SoMP into focus. It is nowhere near as ‘optimistically measured’ as that of the previous statements.
The previous SoMP forecast highlighted that economic growth should begin to flow through in the first half of 2018 with an upward trajectory for the proceeding 12 months. Employment should remain ‘robust’ – unemployment holding at around 5.5% before falling to 5.25% come the end of 2019.
However, it’s the outlook for inflation that should impact the SoMP and markets alike. It is weak and a core component of core inflation is wage growth. The lack of wage growth is a global phenomenon not just a domestic issue; the disconnect between the economic spoils of growth and increases in pay packs was part of the AUD’s decline from September to the December low – will this play out again over the coming four months?
The RBA believes that wages will rise over the coming 24 month forecasted period, yet wages should have already begun this translation and the data release so far suggest they are not. This is a key area to watch in Friday’s release – again a point the AUD should be sensitive too.
One would suspect come Friday night that the interbank, swaps and interest rate markets should will have moved further way from hike probabilities will the AUD also replicate this move?