Market Briefing: RBA rate relief
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RBA relief. As anticipated RBA cut rates yesterday. But was 'hawkish' in terms of future moves. Data will drive the RBA's decisions. AUD near 2-month highs.
RBNZ today. RBNZ expected to cut rates by 50bps for the 3rd straight meeting today. But will it signal a more measured approach from here?
Global trends. Bond yields rose & USD ticked up overnight. UK wages & Canadian CPI surprised to the upside. Global inflation risks remain.
Global Trends
Market moves have been modest overnight despite a few geopolitical and macro developments hitting the wires. In terms of geopolitics officials from the US and Russia ended constructive talks by indicating they will appoint high-level teams to work toward ending the Ukraine “as soon as possible in a way that is enduring, sustainable and acceptable to all sides”. Data-wise, global events have generally been a bit more ‘hawkish’. Yesterday, as expected the RBA cut interest rates by 0.25% but stressed further moves are data dependent and can’t be guaranteed (see below). In the UK, the latest labour market data was better than forecast with unemployment holding steady, jobs growth picking up, and wages (a driver of future inflation) re-accelerating. In Canada, core inflation quickened more than anticipated with the trimmed mean now running at 2.7%pa, towards the upper end of the Bank of Canada’s target band. As a result, expectations of another BoC rate cut in April were pared back from being fully priced in to a ~80% chance. In the UK, the next BoE move is discounted by June.
In response to the events bond yields in the UK, Canada, and the US edged higher, though there was also some catch up in the latter following the holiday earlier in the week. US yields rose ~4-7bps across the curve with the benchmark 10yr rate rising to ~4.55%. This has acted as a headwind for equities with the US S&P500 consolidating near record highs. In FX, the USD index nudged up after falling back over the past week. EUR has slipped down towards ~$1.0440, GBP is below ~$1.26, and the interest rate sensitive USD/JPY is a fraction above ~152. Elsewhere, USD/SGD (now ~1.3428) is tracking around the bottom of its 2-month range. AUD has oscillated in a tight range centered on ~$0.6350, while ahead of today’s RBNZ decision (12pm AEDT) where another 50bp rate cut is looked for and a softish global dairy auction overnight, the NZD has given up ground (now ~$0.57).
In addition to the RBNZ, Australian wages (11:30am AEDT), a speech by BoJ policymaker Takata (12:30pm AEDT), UK CPI inflation (6pm AEDT), and the minutes of the last US Fed meeting (Thurs 6am AEDT) are the main macro focal points on the calendar. While a cautious message about future rate cuts should be a key theme in the US Fed meeting minutes, this is largely now assumed by markets. Hence, we continue to think that the USD is biased to gradually unwind more of its Trump risk premium over the near-term given the reality hasn’t been as harsh or implemented as quickly as what many were anticipating.
Global event radar: RBNZ Meeting (Today), Global PMIs (Fri/Sat), US PCE (1st Mar), China PMI (1st Mar), EZ CPI (3rd Mar), ECB Meeting (7th Mar), US Jobs Report (8th Mar)
Trans-Tasman Zone
In the face of a slightly firmer USD the AUD has held its ground. AUD/USD has hovered in a tight ~0.5% range centered on ~$0.6350 over the past 24hrs as domestic and offshore cross-currents washed through. That said, the local news helped the AUD outperform the EUR, JPY, GBP, and NZD with gains of ~0.2-0.5% recorded. AUD/EUR and AUD/NZD are tracking towards the top of their recent ranges.
Locally, the RBA cut rates by 0.25% yesterday. This lowered the cash rate to 4.1%, and was largely anticipated. The move will provide modest income support for indebted mortgage holders and rate sensitive sectors. But it isn’t a large jolt. What happens next is up in the air. A sharp drop in rates shouldn’t be anticipated with the underlying tone and commentary from the RBA about further moves somewhat ‘hawkish’. According to Governor Bullock the decision does “not imply that further cuts are coming” due to inflation risks and tight labour market conditions. This is inline with our long-held assessment that the RBA, which lagged the global hiking cycle, should also move in small slow steps as it shifts back towards ‘neutral’. Our baseline is that the RBA delivers another 2 rate cuts over the year as it gradually reduces the degree of restrictiveness. Financial markets largely agree with the next RBA rate cut now not priced in until July.
There are likely to be more bumps and renewed bouts of intermittent AUD volatility in the period ahead as US tariff measures are implemented and global risks are navigated. But, on net, we continue to feel downside potential in the AUD should be constrained, and that a further modest grind higher can come through. Relative policy trends between the RBA and other central banks is a factor that can help the AUD outperform currencies like the EUR, CAD, NZD and CNH, in our view. Added to that Australia’s export basket also looks rather tariff-insulated given its minimal manufacturing and with Australia being one of the few nations the US runs a trade surplus with. For more see Market Musings: RBA: Gradual 'relief' cycle kicks off.
Across the Tasman, the RBNZ will be in the spotlight today. The rates decision (12pm AEDT) will be followed by a press conference (1pm AEDT). Based on RBNZ signals and run of economic news markets are discounting almost a 100% chance of another 50bp cut. If delivered, this would be the third-straight 50bp cut and would lower the RBNZ rate to 3.75%. After such an abrupt drop in the level of rates, we wouldn’t be surprised the RBNZ indicates future moves may be more measured. The downshift in NZ rates should be a medium-term NZD headwind, with diverging unemployment rates between Australia and NZ also pointing to more AUD/NZD upside. But based on the prospect of the RBNZ not being more ‘dovish’ than what is baked in we think the NZD risks squeezing a little higher post the event.
AUD & NZD event radar: RBNZ Meeting (Today), RBA Gov. Bullock Speaks (Fri), Global PMIs (Fri/Sat), China PMI (1st Mar), EZ CPI (3rd Mar), AU GDP (5th Mar), ECB Meeting (7th Mar), US Jobs Report (8th Mar)
AUD levels to watch (support / resistance): 0.6260, 0.6310 / 0.6380, 0.6420
NZD levels to watch (support / resistance): 0.5610, 0.5660 / 0.5760, 0.5810
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (19th February) AUD Wage Price Index (Q4) (11:30am) NZD RBNZ Decision (12pm) JPY BoJ’s Takata Speaks (12:30pm) NZD RBNZ Governor Orr Speaks (1pm) GBP CPI Inflation (Jan) (6pm)
THURSDAY (20th February) USD Housing Starts/Building Permits (Jan) (12:30am) USD FOMC Meeting Minutes (6am) USD Fed’s Jefferson Speaks (9am) AUD Jobs Report (Jan) (11:30am) CNY Loan Prime Rate (1yr/5yr) (12pm)
FRIDAY (21st February) EUR ECB’s Makhlouf Speaks (12am) USD Initial Jobless Claims (12:30am) USD Philly Fed Survey (Feb) (12:30am) USD Fed’s Goolsbee Speaks (1:35am) EUR ECB’s Nagel Speaks (3am) USD Fed’s Musalem Speaks (4:05am) USD Fed’s Kugler Speaks (9am) AUD RBA Governor Bullock Speaks (9:30am) JPY CPI Inflation (Jan) (10:30am) GBP Retail Sales (Jan) (6pm) EUR France PMIs (Feb P) (7:15pm) EUR Germany PMIs (Feb P) (7:30pm) EUR PMIs (Feb P) (8pm) GBP PMIs (Feb P) (8:30pm)
SATURDAY (22nd February) CAD Retail Sales (Dec) (12:30am) EUR ECB’s Lane Speaks (1:30am) USD PMIs (Feb P) (1:45am) USD Fed’s Jefferson Speaks (3:30am) CAD BoC Governor Macklem Speaks (4:45am)
*Note, all times/dates provided are AEDT
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