Market Briefing: Will the RBA ease the monetary squeeze?
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European moves. Prospect of more EU defence spending boosted regional equities & bond yields. GBP & JPY firmer. AUD & NZD drift a bit higher.
RBA today. Will the RBA ease some of the monetary squeeze? Markets think so. A 25bp interest rate cut is assigned a ~90% chance.
AUD trends. AUD at levels last traded in mid-Dec. Outcomes compared to expectations drive markets. Is the RBA easing cycle already baked in?
Global Trends
Given the US President’s Day holiday there wasn’t a lot of volatility overnight. The economic newsflow was light, though European markets did react to US Vice President Vance’s blunt weekend speech to the regions leaders indicating less US participation in EU defence. EU leaders are meeting to discuss the Ukraine way and ways to lift regional defence spending. Forward-looking markets don’t stand still for long. And the prospect of more EU defence spending, and in turn greater debt issuance, has quickly washed through. European stockmarkets rose (EuroStoxx600 +0.5% to a record high), with defence related equities leading the charge. European bond yields ticked up with long-end rates ~4-6bps higher.
Elsewhere, market sentiment towards China also looks to be improving. President Xi met with leaders of the IT industry, and this has been taken as a sign the drawn-out crack down on the tech sector may be ending, and/or that more pro-growth policies are in the pipeline to support the Chinese economy. There have been some other encouraging signals from China recently. New credit hit a record in January, with stronger government financing suggesting the fiscal push has kicked off earlier this year as authorities try to offset external headwinds and navigate the trickier economic waters.
In FX, after pulling back over the backend of last week the USD index tread water over the past 24hrs. EUR is hovering near ~$1.0480, the upper end of its ~1-month range, while GBP extended its upswing (now ~$1.2628, a ~2-month high). USD/JPY has also remained under downward pressure (now ~151.40, the lower end of its multi-week range). Closer to home, ahead of tomorrows RBNZ meeting where another 50bp interest rate cut is widely anticipated, the NZD nudged up (now ~$0.5737, levels last traded in mid-December). The AUD also edged up a bit more (now ~$0.6360, also close to its highest point since before Christmas) with today’s RBA decision (2:30pm AEDT) in its crosshairs. As discussed below, the first RBA rate cut of this cycle is expected today, but we think the odds of the RBA holding steady are probably a little more than the ~10% assigned by interest rate markets.
On balance, as outlined over the past few Market Briefings, we believe the USD is biased to unwind more of its Trump risk premium over the near-term. The USD continues to follow a similar path to the period after the 2016 Trump victory. As per back then, traders appear to have too quickly/aggressively factored in the Trump policy agenda into the USD only to be disappointed by the reality not being as harsh or implemented as quickly as assumed.
Global event radar: RBA Meeting (Today), RBNZ Meeting (Weds), 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
The underlying softer tone in the USD has helped the AUD (now ~$0.6360) and NZD (now ~$0.5737) nudge up a bit further. Both the AUD and NZD are now around levels last traded in mid-December with the AUD ~4.5% above its early-February low. That said, the AUD has been a little more mixed on the crosses over the past 24hrs. Modest ~0.1-0.2% gains against the EUR, CAD, and CNH were countered by ~0.2-0.3% falls against GBP and NZD. AUD/JPY was the largest relative mover with the ~0.5% decline on the back of the stronger JPY pushing it back down to ~96.30. Yesterday's stronger than predicted Q4 Japanese GDP data has reinforced calls looking for more BoJ rate hikes down the track.
Today, the RBA decision (2:30pm AEDT) and press conference (from 3:30pm AEDT) are the AUD focal points. Improving inflation impulses have boosted expectations that interest rate ‘relief’ will be announced. Financial markets are assigning a ~90% probability of a 25bp rate cut today, with 30 of 34 economists surveyed also thinking it will happen.
On net, based on broader economic trends and to keep ‘real’ interest rates from mechanically becoming more ‘restrictive’ given the step down in inflation, we believe a rate cut is probable. Although we do think the chances of the RBA holding steady are higher than what markets are factoring in due to the resilient labour market, fiscal spending, and some lingering inflation pressures. Based on these factors we think that if the RBA does deliver an interest rate cut it is unlikely to strongly pre-commit to more action. Rather, we feel it may stress that the ‘recalibration’ lower in interest rates will be contingent on how things evolve. As outlined previously, in our judgement, this looks set to be a modest and drawn-out RBA easing cycle, not an aggressive rapid-fire lowering of interest rates. Our baseline view is that the RBA delivers ~3-4 rate reductions over the year to ease the monetary squeeze being felt by indebted households and interest-rate sensitive businesses.
In our opinion, as markets are driven by outcomes compared to expectations, the RBA delivering a 25bp rate cut and noting future steps are data dependent might see the AUD tick higher. Our wide-ranging ‘fair value’ models continue to indicate that the AUD is ~3-4 cents undervalued. Indeed, in terms of possible short-term reactions, the larger move would likely be generated by a surprise ‘on hold’ decision. Based on modelling an unwinding of the ~23bps of cuts priced in for today's meeting could see the AUD spike ~1%.
AUD & NZD event radar: RBA Meeting (Today), RBNZ Meeting (Weds), 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, 0.5670 / 0.5760, 0.5810
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
TUESDAY (18th February) USD Fed’s Waller Speaks (10am) AUD RBA Decision (2:30pm) AUD RBA Governor Bullock Speaks (3:30pm) GBP Jobs Report (Dec/Jan) (6pm) EUR ECB’s Holzmann Speaks (8pm) GBP BoE Governor Bailey Speaks (8:30pm) EUR Germany ZEW Survey (Feb) (9pm)
WEDNESDAY (19th February) CAD CPI Inflation (Jan) (12:30am) EUR ECB’s Cipollone Speaks (1am) USD NAHB Housing Index (Feb) (2am) USD Fed’s Daly Speaks (2:20am) USD Fed's Barr Speaks (5am) 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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