3 May 2016
RBA preview - what to expect in AUD/USD?
AUD/USD is the one to watch today and those on the periphery such as the Kiwi, CAD and Yen for related yet different reasons.
AUD/USD has been able to set-up prior tot he RBA today close to the 0.77 handle while the greenback continues to fall back as the Fed's window of opportunity to hike rates this year is narrowing rapidly, lifting prospects for a recovery in commodities and subsequently supporting the Aussie. However, today we have the RBA and the Aussie will be on the knee-jerk purely related to the decision on aussie domestics and the accompanying statement.
A cut by the RBA could be justified
There are a number of justifications for the RBA to act this time around after a period of being on hold. The last time the Bank acted was on May 5th 2015 when the RBA cut rates by 25bps to 2.00% and where rates have stayed ever since. The time before that was Feb with an initial 25bps from 2.50%.
2015 was a year of outstanding jobs performance and Stevens was encouraged by domestic growth in the economy and an Aussie adjusting to the commodity prices enabling him to feel confident that policy could be left unchanged since it was working in respect of the bank being able to remain within their preferred inflation bracket between 2-3% and the economy was generally robust in light of Global headwinds.
However, today's outlook probably looks a little different to Stevens, with cooler job vacancies, a stronger Aussie and also being uncomfortably high for the Bank, core inflation moving away from preferred territory, with Core CPI in Q1 just reported last week that rose by just 1.5% y/y, down from 1.9% y/y in Q4 and well below the RBA's target of 2-3% and China still remaining an uncertain bag of risks for Australia. All of that weighs on the outlook for 2017, which is what the Bank are now focused on ultimately while previous policy has still not fully come to fruition in the economy and is still working its way through, as Stevens recently announced in so many words in one of his speeches.
RBA decision out at 2:30pm Syd/12:30pm Sing/HK
Looking to other analysts, Westpac expects rates to remain at 2.0% though they note that markets and analysts are roughly divided 50/50 for a cut v steady hand. "Market pricing for a 25bp cut jumped from around 10% to over 50% after the Q1 inflation report. "Missing the target, however is not about moving outside the range near-term, but staying outside over the medium term. While Westpac expects the Bank will drop their 2016 core inflation forecast to 1.75% from 2.5%, its 2017 forecast should be revised to 2.25% from 2.5% in Feb," explained analysts at Westpac., adding, "If, however, the ‘no policy change' forecast for 2017 was instead 1.75% then there would be little choice but to cut rates."
Importantly, the analysts also explained that it is crucial the Bank maintains its GDP growth forecast of 3.0% in 2017 – above trend of 2.75% and indicating some upward pressure on inflation from a tightening of the output gap including a strengthening labour market.
AUD/USD levels to monitor
Whichever way this goes today, there could be extremes of the recent ranges tested. A steady RBA this week could see the bulls attacking the late April highs of 0.7760/80 level before a break to 0.7833 and 2016 highs also scored last month. 0.7850 is the ultimate target level in such a move as being the 38.2% retracement of move down from 20140. 8088 was the 2015 high and while it is not a level likely achieved on a single, on-hold outcome from the Bank, but in respect of the Fed also seemingly on hold the level is on the map for a near-term target.
AUD/USD headed back to 0.7200? - ING
On the other hand, should the bank cut rates, joining the panel of Banks that are struggling to achieve their goals for their economy, it could be perceived highly bearish and fast a break below the 50 dma at 0.7551 opens 0.7500 and a break there would otherwise confirm the major reversal and bears back in control.
AUD/USD has been able to set-up prior tot he RBA today close to the 0.77 handle while the greenback continues to fall back as the Fed's window of opportunity to hike rates this year is narrowing rapidly, lifting prospects for a recovery in commodities and subsequently supporting the Aussie. However, today we have the RBA and the Aussie will be on the knee-jerk purely related to the decision on aussie domestics and the accompanying statement.
A cut by the RBA could be justified
There are a number of justifications for the RBA to act this time around after a period of being on hold. The last time the Bank acted was on May 5th 2015 when the RBA cut rates by 25bps to 2.00% and where rates have stayed ever since. The time before that was Feb with an initial 25bps from 2.50%.
2015 was a year of outstanding jobs performance and Stevens was encouraged by domestic growth in the economy and an Aussie adjusting to the commodity prices enabling him to feel confident that policy could be left unchanged since it was working in respect of the bank being able to remain within their preferred inflation bracket between 2-3% and the economy was generally robust in light of Global headwinds.
However, today's outlook probably looks a little different to Stevens, with cooler job vacancies, a stronger Aussie and also being uncomfortably high for the Bank, core inflation moving away from preferred territory, with Core CPI in Q1 just reported last week that rose by just 1.5% y/y, down from 1.9% y/y in Q4 and well below the RBA's target of 2-3% and China still remaining an uncertain bag of risks for Australia. All of that weighs on the outlook for 2017, which is what the Bank are now focused on ultimately while previous policy has still not fully come to fruition in the economy and is still working its way through, as Stevens recently announced in so many words in one of his speeches.
RBA decision out at 2:30pm Syd/12:30pm Sing/HK
Looking to other analysts, Westpac expects rates to remain at 2.0% though they note that markets and analysts are roughly divided 50/50 for a cut v steady hand. "Market pricing for a 25bp cut jumped from around 10% to over 50% after the Q1 inflation report. "Missing the target, however is not about moving outside the range near-term, but staying outside over the medium term. While Westpac expects the Bank will drop their 2016 core inflation forecast to 1.75% from 2.5%, its 2017 forecast should be revised to 2.25% from 2.5% in Feb," explained analysts at Westpac., adding, "If, however, the ‘no policy change' forecast for 2017 was instead 1.75% then there would be little choice but to cut rates."
Importantly, the analysts also explained that it is crucial the Bank maintains its GDP growth forecast of 3.0% in 2017 – above trend of 2.75% and indicating some upward pressure on inflation from a tightening of the output gap including a strengthening labour market.
AUD/USD levels to monitor
Whichever way this goes today, there could be extremes of the recent ranges tested. A steady RBA this week could see the bulls attacking the late April highs of 0.7760/80 level before a break to 0.7833 and 2016 highs also scored last month. 0.7850 is the ultimate target level in such a move as being the 38.2% retracement of move down from 20140. 8088 was the 2015 high and while it is not a level likely achieved on a single, on-hold outcome from the Bank, but in respect of the Fed also seemingly on hold the level is on the map for a near-term target.
AUD/USD headed back to 0.7200? - ING
On the other hand, should the bank cut rates, joining the panel of Banks that are struggling to achieve their goals for their economy, it could be perceived highly bearish and fast a break below the 50 dma at 0.7551 opens 0.7500 and a break there would otherwise confirm the major reversal and bears back in control.